Big box office among private equity players
Sydney Morning Herald
Thursday March 4, 2010
The czars of the Australian private equity industry will come out of hiding en masse today for their annual get-together. This year's will probably mirror last year as they ponder how to change their model sufficiently to secure their future.Over the past six to nine months these aptly named private equity players have lifted their heads above the parapet only to sell assets that were acquired in the good old pre-GFC days when debt was cheap and equity markets were overheated.Myer and Kathmandu are recent examples of closing out private equity deals and both paid their owners handsome profits.But there is little evidence of private equity firms acquiring businesses these days and weaving their financial engineering magic - traditionally involving buying businesses with strong cash flows, gearing the assets, taking out a wad of cash in advance, cutting costs, pumping out some stronger profit numbers and selling the business back to the public.Thankfully for the private equity players, the equity market in Australia is now sufficiently buoyant for some to empty the hollow logs and sell assets bought before the GFC. As such it will be interesting to see what Hoyts's executive chairman, David Kirk, has to say when he addresses the private equity conference this week.Kirk has taken a minor equity stake in Hoyts, which a couple of years back private equity firm Pacific Equity Partners bought from James Packer and West Australian Newspapers.This week it has come to light that PEP is reviewing its strategic options, usually management-speak for working towards an initial public offering. But Kirk says it could involve doing nothing, a trade sale or an IPO.A trade sale must be considered unlikely because it has already received the private equity treatment and its two rivals, Greater Union and Village, would probably be prohibited by the Australian Competition and Consumer Commission from buying Hoyts.PEP could always opt for the status quo but that is not how these firms make money. If conditions are ripe to sell the asset back into the market, they need to grab the opportunity.This is presumably why PEP has been canvassing investment banks.Hoyts and other major cinema chains have been experiencing a tidy lift in ticket revenues over the past 18 months.There are two reasons for this. The biggest single factor influencing cinema revenues is product - which is why profits can be a bit lumpy. But the good news for Hoyts is that there has been a string of box office hits over the past year, with the biggest being James Cameron's Avatar.It has made a fortune for Rupert Murdoch's Fox Studios and has been responsible for a surge in cinema attendances. But it's done more than that. It has been instrumental in the transformation from cinema into new media.Avatar and other 3D movies have reinvigorated the industry, bringing new audiences that can be charged a premium price for a 3D ticket.On the cost side the introduction of digital films has also saved Hoyts a couple of million in costs. And the best part is that distributors such as Fox pay for more than 50 per cent of the cost of upgrading cinema screens to become digitally enabled. The upgrade costs about $100,00 per screen.Over time the need to pour capital expenditure into cinemas will put pressure on some of the smaller independent theatres. Arguably, that's not so good for the public but it gives the big chains an advantage.The crucial factor in the decision to float Hoyts will be what the investment bankers pitch as a potential selling price.A little over two years after PEP paid $440 million for this business, its box office earnings have grown substantially. In the last calendar year its box office revenue improved by some 15 per cent, with even more growth in the 2010 financial year.Cinemas are high fixed-cost businesses and a 15 per cent improvement in revenue can translate to a 30 per cent rise in earnings before interest, tax, depreciation and amortisation.Digitisation and the wave of 3D product will be the strongest selling points for Hoyts. Still, there is plenty of wariness in investor land about private equity repackaging.
© 2010 Sydney Morning Herald
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