Portfolio.hu Interview - Palace Cinemas conquers Budapest

Do you know how many people visit Hungary's most frequented movie theatre, the Palace Cinema in Budapest's WestEnd mall? Is it hefty popcorn bags or the tickets that bring the largest revenues to the operator of the cinema? Do Czechs or Hungarians go to the movies more often? How big a slice Palace Cinemas carved out of the Hungarian cinema market? These are only some of the questions Portfolio.hu has put to V. J. Maury, managing director of Palace Cinemas in an interview.

70% market share in Budapest

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Portfolio.hu: Palace Cinemas has been most active in the Hungarian market, acquiring quite a few cinemas and becoming a market leader. Tell us a little bit about the company and its history.

V. J. Maury: I am actually one of the founders of the company; we started our operations in 1999. Originally we formed a joint venture with UCI (Universal and Paramount). They had had plans for bigger expansion but in 2001-2002 there were some problems with the exhibition market and they decided not to continue their expansion. So we bought them out with the help of Argus Capital. At the moment we have 20 sites in Hungary and only three of them were originally set up by us, the other ones were acquisitions.

We acquired Star Century in 2002, so in that year we grew to 10 sites in three countries. Unfortunately 2005 was a "down" year for box office worldwide but that actually created some opportunities for us to improve the company a little more. At that point we were able to begin discussions about the Mammut transaction, which occurred in November of the same year.

In 2006 we closed the InterCom deal as well and took over their sites in August. Our market share in Hungary right now is about 50-60%, while in Budapest it is a little bit higher, about 60-70%.

Portfolio.hu: What does the ownership structure look like? You are not only present in Hungary, but also in the Czech Republic and Slovakia.

V. J. Maury: Argus Capital is the majority shareholder, they own 95% of Palace Cinemas. In the Czech Republic we are the leading exhibitor as well, we own 6 sites, 4 in Prague and 2 in Brno. We also have one site in Bratislava, which is the leading site in Slovakia. Of course we are always looking at new opportunities and new markets. We have done it a couple of times now so we feel quite confident that we can do it. When we enter a new market, we usually like to get a real presence and not just one cinema.

Portfolio.hu: Didn't GVH, the Hungarian competition watchdog, object to the deal? Wasn't it concerned that the bulk of the market will be in one hand?

V. J. Maury: According to EU regulations, competition authorities start to investigate market concentration only above a certain market size. The Hungarian cinema market did not reach this threshold therefore GVH did not deal with our takeovers.

(According to our best knowledge, litigation between GVH and Palace Cinemas, which was launched in 2002, ended with the victory of the watchdog in April 2007, and Palace Cinemas was fined HUF 83 million for acting in cartel with the rest of Budapest multiplex operators.) - note by the editor.

Portfolio.hu: How do you valuate a cinema transaction? What valuation/appraisal method do you usually use? And also, when you talk about a acquiring a new site, which part of the company do you actually buy?

V. J. Maury: You never rely on just one thing but always on several factors. The hard way to do it is discounted cash flow, the easier way to do it is EBITDA-multiple. You also have to take into account such factors as future projects or potential threat from competition.

In the case of the Mammut transaction we acquired the whole company and then sold the assets to the owner of Mammut and signed a long-term lease contract with them. As for the InterCom deal we only bought the assets.

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1. 70% market share in Budapest
2. 1.2 million admissions in WestEnd
3. Main revenue sources: tickets, coke, advertisements...