Inox-Fame deal valuation seen fair

The acquisition price of Rs44 per share paid by Inox Leisure Ltd (ILL) to promoters of Fame India Ltd (FIL) has been a matter thrashed across media in the last couple of days. The contention seems to largely revolving around the fact that the deal was concluded at lower valuation.

While the industry at large views the deal as a positive development with a holistic approach in terms of valuations, Anil Ambani-promoted Reliance Mediaworks Ltd (RML) feels otherwise emphasising on the fact that they offered a much better price of Rs80 per share.

Fame promoter Shravan Shroff though has been quoted in media reports saying, ‘Reliance Media had not made any written offer to me on a higher price’, thus putting an end to the speculation on a higher acquisition price.

DNA Money looked into the nitty-gritty of the deal analysing all the possible parameters that may have been taken into consideration before arriving at a fair acquisition price.

In terms of Fame’s market value, its average stock price for 12 months ending December 2009 was Rs 20.76 on the Bombay Stock Exchange (BSE) and Rs 20.77 on the National Stock Exchange (NSE).

Additionally, the stock price for six months ended December 2009 stood at Rs 26.50 and Rs 26.52 on the BSE and NSE, respectively, and at Rs 31.34 and Rs 31.33 for 3 months to December.

The acquisition cost of Rs 44 per share thus represents a premium of 112% over the 12-month average price.

The premium is 66% and 40% over Fame’s six-month and three-month average price. “This clearly indicates the transaction is not undervalued and has already factored in the ‘control premium’ aspect associated with such transactions,” said an analyst, not wishing to be named.

Taking the enterprise value to earnings before interest, tax, depreciation and amortisation (Ebitda) parameter into consideration, Fame has got the highest EV to Ebitda multiple compared with peers.

Comparing current market price of its peers and the net debt on their balance sheet as of March 31, 2009, the EV to Ebitda multiple of PVR is 8, while it’s 9 for Cinemax.

Inox enjoyed the highest EV to Ebitda multiple of 15 and the weighted average for the multiplex sector is 10.38.

“At Rs 44 per share, the EV to Ebitda multiple of Fame would be 18 which is 75% higher than the industry average,” said the analyst.

On the profitability parameter, for the year ended March 31, 2009, PVR registered a net profit of Rs 8.71 crore, Cinemax (Rs 11.05 crore) and Inox (Rs 24.34 crore). Fame India booked Rs 3.43 crore in net profit in that fiscal.

Interestingly, for the nine months ending December 2009, while peers in the multiplex sector returned profits to the tune of Rs 0.95 crore (PVR), Rs 10.03 crore (Inox) and Rs 12.53 crore (Cinemax), Fame India was the only company in the red with a loss of Rs 3.56 crore.

Even on the leverage part, the debt to equity ratio with Fame India was the highest at 1.27 while it was 0.44 for PVR and 0.53 for Cinemax. Inox had the lowest debt to equity at 0.16.

Further pressurising Fame’s debt position is the very fact that it has added Rs 55 crore in domestic debt to the already existing Rs 80 crore on account of FCCBs to be converted or redeemed by April 22, 2011.

“Based on the cash generated from operations, it is unlikely that Fame would have been able to honour this debt when it fell due. This would have lead to a potential insolvency situation for the company - a factor that would have had a bearing on the company’s valuation and would have been factored in the acquisition price,” asserted the analyst.