Cineworld's Regal Bid Shows Movie-Theater Squeeze

(Bloomberg Gadfly) -- As movie-theater companies suffer from low attendance, they're asking investors for an onerous favor: "Sit tight for a few years, enjoy the show and ignore the exit signs, while we go spend a ton of your money." And that's going about as well as you might expect. 

Shares of AMC Entertainment Group Inc., the biggest U.S. exhibitor, have plunged 52 percent over the past year, as it scooped up American rival Carmike, Europe's Odeon & UCI and a smaller Swedish chain called Nordic Cinema -- in all totaling almost $3 billion (including debt). 

Now, the U.K.'s Cineworld Group Plc is following a similar playbook, and its stock is also taking a beating. The price sank 16 percent on Wednesday after Cineworld confirmed that it's discussing a more than $3 billion acquisition of Regal Entertainment Group, the second-biggest U.S. theater chain, which is controlled by 77-year-old billionaire Philip Anschutz. 

Fewer people are visiting movie theaters, and higher ticket prices are failing to make up for the revenue shortfall. That's forcing the largest cinema operators to go on a spending spree. They're buying as many worthwhile theaters as they can, while also undertaking costly renovations to add features such as reclining chairs and expanded food-and-drink counters in hopes of keeping customers from permanently converting into Netflix-hooked couch potatoes. This has left AMC looking like it ate way too much popcorn, with net debt having swelled to 5.6 times adjusted trailing 12-month Ebitda. 

For Cineworld, these industry trends are compounded by economic headwinds caused by Britain's plan to exit the European Union. Recent reports showed U.K. consumer spending fell 2 percent in October, the most in just over four years, while confidence tumbled this month to the lowest level since the aftermath of last year's Brexit vote. No wonder Cineworld is looking to other markets. 

Given all this, the deal strategy sounds logical. If theater owners don't get bigger and change the movie-going experience, they'll simply go away. But they may anyway. 

Anschutz and Regal see the worsening challenges ahead and the debt AMC has had to go into, and so they seem eager to cash out. Regal tried to sell itself in recent years to no avail, so it's interesting that a foreign buyer has emerged with an attractive offer after the dismal summer box office. 

The takeover price being discussed is $23 a share, to be paid entirely in cash. That's 42 percent higher than Regal's 20-day trading average and is close to Regal's all-time high closing price of $24.45 last November. The transaction would amount to a healthy multiple of 10 times Regal's trailing 12-month Ebitda, while AMC is valued at just 8 times Ebitda on an adjusted basis. Kudos to Regal CEO Amy Miles and her board.

If Regal does formalize a sale to Cineworld, that would leave the two biggest U.S. chains under foreign ownership, as AMC has been controlled by Wang Jianlin's Dalian Wanda Group of China since 2012. But AMC continues to trade on the New York Stock Exchange, while Regal wouldn't. 

The good news for AMC, Cineworld and other operators is that audiences are still showing up for big movie events like the recent "Wonder Woman" film from Time Warner Inc.'s Warner Bros. and the next "Star Wars" coming in December from Walt Disney Co., which brilliantly acquired Lucasfilm in 2012. 

But what happens if (when?) Hollywood runs with premium video-on-demand titles? While AMC has insisted that exhibitors will demand favorable terms, it's hard to see the glass half full when the idea of PVOD is to offer new movies for rent only a month or so after they've hit theaters, shortening the traditional 90-day exclusivity window that theaters currently have.

It does help to have nicer, more comfortable theaters that offer better food choices and even alcoholic beverages. Many people are willing to spend if it's worth their while, and AMC already has recliners in 40 percent of its screens (barely any Carmikes and Odeons have them yet though), versus 25 percent at Regal. 

But the payoff is uncertain and there's no telling whether these extravagant outlays will even ensure the longevity of the industry. Regal's exit strategy is the writing on the wall. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

To contact the author of this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.

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