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postheadericon Cineworld’s Spanish Venture: Buy When There’s Blood In The Streets?

On 7th April Cineworld announced it had agreed to acquire 10o% of the share capital of Cinesur Circuito Sánchez-Ramade, S.L. Gross assets of €18.6 million, comprising 11 multiplexes with a total of 136 screens, were to be acquired, though the value of the transaction was not disclosed.

To add a little detail to the company’s brief press release, in fact only a part of the Cinesur circuit is being acquired. Four cinemas: Plaza Eboli in Madrid, the Alkazar in Cordoba, Cervantes in Jaen, and Cinesur Larios in Malaga did not form part of the package. The last two-named have already closed. The sale itself is reported in Spain to be part of a cash-raising exercise designed to rescue the larger Sanchez Ramade group, whose property development subsidiary Noriega has already filed for bankruptcy. The Spanish press is less useful on the question of price, though one report cited a source suggesting the transaction was in the range of €30 to €50 million, rather than the €60 million at which the circuit had been offered in Summer 2010.

This is an interesting figure. EBITDA of the acquired company was €2.3 million in 2009, a figure which is unlikely to have increased in 2010 when Spanish admissions fell around 12%. So either the four cinemas not acquired were making losses at the EBITDA level or Cineworld has paid a very full price – if one believes €30 million suggested in the press.

Concerning the wider logic of the deal, there are two key aspects. The first is the condition of the Spanish market itself: Spanish cinema admissions declined from 435 million a year in 1965 to 93 million by 1991, a pattern familiar from many other European countries. By 2001 the market had recovered to 147 million admissions, again not untypical. The decline since then to just 97 million last year, 2010, has rather fewer parallels. With a piracy problem of long-standing and, now, huge youth unemployment, the big positive about this cinema market is that it probably cannot get much worse.

The second aspect is that, as Cineworld has hinted, Spain looks a suitable candidate for a consolidation strategy. There are many survivors from among the regional circuits that used to dominate the industry and, in the way of things, some are run better than others. Cineworld can buy some of these circuits, close head offices, lose under-performing cinemas and, in some cases, apply improved management. We have every belief that management is capable of executing such a strategy successfully, only assuming the company avoids overpaying for acquisitions.

Cinesur Circuito Sánchez-Ramade, S.L.

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