Multiplex chain Cinemax India Ltd is at work to rope in a private equity partner as it charts aggressive growth plans in a fast consolidating industry. Mumbai-based Cinemax, which has around 94 screens, could be looking to raise over Rs 150 crore to expand screens and locations, sources directly familiar with the development said.

This could be a structured private equity transaction through convertible instruments like debentures given the firm's lower market capitalization at present, said one source. The company, which could be more than doubling its operations in the next two or three years,

 expects the deal at a higher valuation compared to current stock price, as PE investor will be buying into a substantive growth story. 

Cinemax is being advised by Enam on the possible fund raising options, which might be combination of debt and equity, sources added. The stock closed at Rs 59.75, down 4.93%, in a tepid Mumbai market. 

Cinemax has been promoted by real estate group Kanakia, which holds around 68% in the company. The company had revenues Rs 176 crore with a profit after tax Rs 17 crore for FY10. This as compared to revenues of Rs 154 crore and PAT of Rs 11 crore in FY09.

Kanakias are keen on retaining management control, and will remain as the largest stakeholder even if the PE deal goes through, sources said. 

Many large PE deals now are structured financing with a convertible option built-in, with the funds accepting a cap on IRR if the promoter repays the debt before conversion into equity. The fundraising could  be anywhere from $30-40 million depending on the structuring and the level of investor interest. 

Emails sent to Cinemax and Enam did not elicit a response at the time of publication of this article. 

Cinemax may also benefit from the promoter group's core activity as real estate cost is key to the operational metrics of multiplexes. This could help Cinemax identify strategic locations at economic prices and complete projects in a time and cost effective manner as it expands. 

It remains to be seen what kind of valuation Cinemax is able to attract. According to its closing market cap of Rs 170 crore yesterday, the per screen valuation stands at Rs 1.87 crore. While this seems higher than the Rs 1.6 crore per screen paid by INOX to buy

 promoters stake in Fame India, it is  less than what PVR offered for DT Cinemas. PVR was paying Rs 60 crore through a mixture of cash and equity for DT's 26 screens (translating to Rs 2.3 crore per screen) earlier this year, but that deal was called off.

Cinemax, in a recent investor presentation, said it would be adding 42 screens with over 9,300 seats in the current financial year. The firm's existing portfolio includes 26 screens that are owned, mostly in Mumbai, which could add buoyancy to valuation. But what might be impacting the valuation of Cinemax is its debt, which is expected at Rs 96 crore this year, according to a report by Angel Broking. The debt stood at Rs 81 crore in FY2009. 

There have been successful PE investments in the business of movie exhibition in India in the past. ICICI Venture, which had invested in PVR Ltd in 2003, made a reported 4x when it exited the firm during its IPO. Another investment was India Value Fund's deal with Fame India. The PE firm had sold its stake Singapore state investor Temasek through market transactions. 

But these investments were made 8-10 years ago and the industry has fast consolidated since then. Major chains besides Cinemax include  PVR, Big Cinemas, Inox and Fun Cinemas. Inox and Reliance Media Works (holding firm of Big Cimemas) are engaged in a battle to acquire Fame India. Anil Dhirubhai Ambani Group's RMW has been relentless on

gaining size ever since the acquisition of Manmohan Shetty's Adlabs some years ago.

Besides, several international multiplex operators are eyeing India, one of the potentially largest theatrical markets in the world.  Mexico-based multiplex operator Cinepolis, which opened its first theater in India last year, is also eyeing major expansion in the  country. PVR also sold a around a 11% stake to Major Cineplex Group Plc. of Thailand in November 2009.

Over the next five years, Indian film industry is expected to to grow at a CAGR of 9% to reach a size of Rs 137 billion by 2014, according to recent FICCI KPMG report. Growth factors will include expansion of multiplex screens leading to better realisations, increase in number of digital screens facilitating wider releases, higher C&S revenues, among others.

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