Cinema purchase price exceeds cost by 5 times industry: mergers and acquisitions are an inevitable trend

At this stage of development of the cinema market, mergers and acquisitions are an inevitable trend. However, during the free discussion period between the bosses of several major domestic film and investment companies, everyone came to the unanimous result that "the cinema price is too expensive." Each company formulated acquisition plans at the beginning of the year, but the funds prepared were far from enough to meet the number of theaters planned for the acquisition.

Recently, the nearly week-and-a-half-week Shanghai Film Festival in Shanghai came to an end. The reporter had the honor to participate in the forum with the theme of "Domestic Theater and Theater Industry Pattern and Mergers and Acquisitions Prospects." At the forum, analyst Wang Zheng of Everbright Securities gave a comparative introduction to the development history of the Chinese and American film markets, predicting that China's cinema market will enter the development stage of mergers and acquisitions integration. I very much agree with this judgment. At this stage of development of the cinema market, mergers and acquisitions are an inevitable trend. However, during the free discussion period between the bosses of several major domestic film and investment companies, everyone came to the unanimous result that "the cinema price is too expensive." Each company formulated acquisition plans at the beginning of the year, but the funds prepared were far from enough to meet the number of theaters planned for the acquisition.

This raises two questions. Are the theater prices expensive or not? Will the theater owner's theater sell it or not sell it?

1. Let's first discuss the first question,"Are the theater prices expensive or not?"

The high price of cinemas is mainly due to the following reasons:

1) Wanda Theater Line should be the initiator of the high purchase price of cinemas. Wanda's acquisition of Shimao Cinema in 2015 was really a cost-effective business and built a solid moat for itself. Once the high price of 1 billion yuan and 15 theaters for Wanda Theater was announced, the industry was in an uproar. Wanda quoted an average of nearly 70 million yuan per theater, which greatly raised the psychological expectations of the owners of the movie investment company and formed a benchmark for theater sales prices. From then on, whether it sells or not, the investment company will evaluate its own worth based on this valuation evaluation. This has greatly increased the prices for other film investment companies to acquire theaters, delayed the progress of industry integration and mergers and acquisitions, and indirectly consolidated Wanda Cinema's domestic status.

2) Under the weak economic situation of the real economy, the media industry has maintained continued growth, and media stocks have a high valuation in domestic A-shares. Many low-valuation listed companies hope to transform into the film industry and increase their market value. Cinema has become a good tool for market value management of listed companies. Compared with the premium of the stock price, several hundred million yuan in cinema acquisition funds is quite favorable for listed companies (but the CSRC has recently strengthened its supervision on cross-border mergers and acquisitions and backdoor borrowing, which has cooled this hot business). Therefore, all major film investment companies have established or will set up M & A funds to acquire cinemas on a large scale. The acquired cinemas are first cultured and integrated in vitro, and then loaded into a listed company after they mature. The emergence of funds has increased leverage and amplified the amount of money used to acquire theaters.

3) Cinema prices are more expensive because of the scarcity of location. Mature community plans have been set up for a long time and will not be major changes. This has resulted in a limited number of theaters in the area. The theater lease is locked for 15-20 years. Unless acquired, it is impossible to open new theaters in the area. Let's take Lujiazui in Shanghai as an example. There are only two movie studios in Lujiazui, Zhengda Xingmei and Belle Palace. There is currently no place in Lujiazui to open cinemas, so the cinemas in Xingmei and Belle Palace naturally become scarce resources. Moreover, cinemas in such places have extremely high advertising value and theater brand effect, and the price is naturally expensive.

4) Cinema has become the main way for commercial complexes to increase popularity and an important source of consumption data. Good cinemas can bring a lot of popularity and consumption to shopping malls, and cinemas have become central places for cultural consumption. With such popularity, the price is naturally high.

So what price do theaters usually sell at? Normal acquisitions will evaluate the price by calculating P/E and EBITDA. However, because many theaters 'financial systems are not sound and some of their income is not recorded at all, traditional evaluation methods cannot accurately estimate the value of the theater. At present, in the theater M & A market, individual theaters are basically purchased directly at a price of 2-3 times the annual box office. If the acquisition target is a professional investment company and has already signed in many new project venues, the acquisition price will be higher. For example, there is a theater with 1200 seats and an annual box office of 20 million yuan. The purchase price is close to 60 million yuan. The overall investment of a theater of this size should not exceed 20 million yuan, and there is no need for a one-time investment. The total equipment investment of approximately 6 million yuan can be solved through financial leasing, and part of the cash can be recovered in the form of pre-sale membership cards after the opening of business (assuming 4 million yuan). If the theater is sold, then the theater will exchange an actual investment of 10 million yuan for a revenue of 60 million yuan. From this perspective, the purchase price of the theater is indeed not cheap.

2. With such a high return, will the theater sell it or not? We made the following analysis.

First of all, let's analyze that in 2016, the overall environment for cinema operations has undergone major changes:

1) There are many homogeneous cinemas, and theater competition has been upgraded, and the requirements for cinema operators are becoming higher and higher; if they do not have their own characteristics and specialties, there is limited room for growth in non-ticket revenue of single cinemas, and the pressure for survival is gradually increasing.

2) Policing is becoming stricter, and gray box office revenue in small cities and county-level cinemas is becoming less and less. The box office of movies in China increased significantly in 2015, especially in fourth and fifth tier cities. Part of the reason was that the State Administration of Radio, Film and Television strengthened the investigation and punishment of box office theft. The cost of box office theft for small cinemas has become higher. The era of county-level cinemas making a fortune through box office theft is over.

3) As the proportion of online ticket purchases through third parties continues to increase, the ticket compensation of third-party ticket purchasing websites has gradually decreased. As the market share of Cat's Eye, Microfilm and glutinous rice increases and increases, the bargaining power of third parties on the theater side is getting stronger and stronger. At a certain stage in the future, theaters may also donate money to third-party websites.

4) BAT began to invest in or acquire theaters. BAT, especially Alibaba and Tencent, began to fully penetrate the film industry. Through the consumption data fed back by theaters, targeted marketing work can help theaters provide non-ticket income.

5) All cinemas have begun to pay attention to increasing non-ticket revenue. Against the background that no money can be made by selling movie tickets, various theaters hope to increase non-ticket income to make profits, which reflects the fierce competition in the theater market. At this year's Shanghai Film Festival's equipment exhibition, we saw a large number of shops occupied by popcorn and advertising companies.

Through the above changes, we can see that the cinema market has gradually transformed from the original blue ocean market to the Red Sea. Due to the better lease conditions signed for individual projects, there is still profit margin. Most cinemas have made profits solely by selling movie tickets. Future competition will test the integration of the industrial chain and the investment company's own internal strength.

3. Whether the theater is to sell or not, different choices can be made for film investment companies in different states.

1) Pursuing comfort: At present, the arms race in theaters has begun. Some film investment companies are weak in subsequent development. Existing resources and management capabilities cannot allow the company to rise to a higher level. Such companies can sell it as a whole or hand over control. Big film investment companies can keep part of their shares without missing out on enjoying the dividends of future development.

2) Proactive and enterprising: This type of company has sufficient project reserves, a considerable number of theater construction projects every year, clear internal strategic ideas, and sufficient funding preparations. The focus is on improving theater operations and the construction of new theaters, unless there is a particularly good merger target. Otherwise, there is no need to disperse ammunition to blindly expand the number of theaters. Cultural integration and brand integration after mergers and acquisitions are actually not easy.

3) Watching while walking: Such a film investment company still has several projects to be built on hand, the profits of the theaters that have already opened are considerable, and its operating pressure is not great. Then you might as well wait until all the projects you have built are completed before selling them as a whole.

4) Local tyrants: If you don't lack money, why sell cinemas for this small profit? Pay more money and build more cinemas yourself. A few days ago, I heard that Baoneng was also building a theater. I don't know where the theater is and I want to go and have a look.

The current valuation of cinemas is not low, and the mature cinemas at hand can be sold. The funds obtained can be used to expand new cinemas or wait and see. The money is safe and can be advanced or retreated. After all, no one can accurately predict where the peak will be. Blind expansion can really become a naked swimmer.

Editor: Nancy