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postheadericon How to Value a Cinema Chain

A report in the Financial Times on July 17th suggested OMERS (Ontario Municipal Employees Retirement System) would be a bidder in an auction for the Vue circuit due later this year, alongside the private equity firms Kohlberg Kravis Roberts and Permira. Although OMERS itself is a pension fund, it is the private equity arm of OMERS that is expected to bid. 

So how much is the successful bidder going to have to pay? Cinema circuits have traditionally been valued in terms of a multiple of EBITDA (earnings before tax, depreciation and amortisation), or broadly operating profit with depreciation charges added back. Currently circuits are selling for six or seven times EBITDA.

 Coincidentally, the closest comparable quoted circuit to Vue, Cineworld Cinemas, is trading on an implied valuation of around seven times historic EBITDA. At £1.98 each the company’s 141.7 million shares give a market capitalisation of £280 million; adding £109 million of long term debt, the resulting EV (enterprise value) of £389 million works out at 7.1x its £55 million of EBITDA in 2009.

 The comparable EBITDA figure for Vue is £50.7 million so on this basis Vue is likely to be valued at close to £360 million.

 Further consolidation in the UK cinema market is complicated due to competition concerns, all but ruling out a domestic trade buyer. Equally, it is hard to see why an overseas-based exhibitor would want to invest in the mature UK cinema market. Which leaves a private equity buyer or a flotation.

 The problem for a private equity buyer will be to work out how to make a return on its investment. Vue is already a big player in what is essentially a mature market. Another flotation could still be on the cards.

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