Powered by WP Bannerize

postheadericon Valuation Anomalies: A Tale of Two Small European Countries

The recent sale of the Finnish exhibitor, Finnkino Oy, to the Swedish private equity firm Ratos AB, reminded me of a conversation with a UK exhibitor in the early 1990s. His company had looked at Finnkino, then also for sale, but they’d concluded that if the then current owners couldn’t make any money out of it, they probably couldn’t either.

Today Finnkino is a profitable, well-run company, with significant exhibition interests in the Baltic States alongside its dominant position in the Finnish market. But Finland is still a low attending country as far as cinema is concerned, with the relatively high operating costs typical of Northern Europe.

Ratos is hoping to improve profits by building new cinemas to drive attendance, and also presumably anticipating an economic recovery in the Baltic States. In 2010 Finnkino made EBITDA of €8.5 million from revenues of €88.6 million. Ratos, however, was persuaded to pay €94.3 million for the circuit. At 11 times EBITDA this is a demanding valuation: Ratos would need to get Finnkino’s EBITDA margin up to around 15% of revenue instead of 2010′s 10% just to match the recent Vue deal (see How To Value a Cinema Chain: Part 2). Although this is probably do-able, more progress will depend on getting significantly more Finns into cinemas. Given that attendance levels have been flat since the 1980s, this might prove tricky.

Contrast the situation of another small country exhibitor: Belgium’s Kinepolis, which is quoted on the Brussels bourse. Like Finnkino, Kinepolis dominates its home market and has interests in neighbouring countries, and it is regarded as among the best-run and most innovative exhibitors in Europe. At its current share price of €54, however, stock market investors value the company at an enterprise value of roughly €430 million, less than seven times its 2010 EBITDA of €65 million. This low valuation is all the more remarkable considering Kinepolis, unusually for a cinema circuit, owns its own land and buildings – to the tune of €197 million in its 2010 accounts.

So both valuations seem anomalous, one too high, the other too low, but with private equity’s aversion to hostile takeovers and stock market investors’ less optimistic view of exhibition, such anomalies may well persist.

Be Sociable, Share!

Leave a Reply