AMC's Carmike Deal: Analysts Discuss Benefits, Risks
"AMC's new CEO Adam Aron has been in the theater industry for just over 60 days and, already, is shaking it up," writes FBR analyst Barton Crockett.
Wall Street analysts on Friday chimed in on the benefits and regulatory risks of AMC Entertainment's agreement to acquire Carmike Cinemas in a deal valued at $1.1 billion.
The planned combination of AMC's 5,426 screens with Carmike’s 2,954, expected to close by the end of the year, would create the biggest theater circuit in the U.S. and around the world. Chinese conglomerate Dalian Wanda Group owns AMC, led by CEO Adam Aron, who became AMC CEO and president in January along with Legendary Entertainment.
"The transaction appears accretive," said MKM Partners analyst Eric Handler in a note to investors on Friday. "We do not anticipate any significant divestitures from theatre overlap, but there could be some questions about AMC owning 18 percent of National CineMedia and Carmike's 20 percent interest in Screenvision."
He explains to THR: "Regulatory typically looks at market by market concentration when it reviews theatre deals. Overall size has never been a concern."
Best practices for concession sales will be interesting to watch, especially since Carmike generates an industry-high per-capita spend of $4.84, which is nearly 5 percent higher than AMC's per-capita spend of $4.62.
FBR analyst Barton Crockett used the headline "AMC's New CEO Starts With a Bang" for his report. "AMC's new CEO Adam Aron has been in the theater industry for just over 60 days and, already, is shaking it up," it said.
The analyst also touted the "strategic scale advantages." In 2015, Regal, AMC, Cinemark and Carmike had 16 percent, 15 percent, 14 percent, and percent shares, respectively, of North American theater attendance, and the deal would push AMC to the top spot with 20 percent, he said. "AMC CEO Aron has spoken of meaningful opportunities to improve membership programs in the theater industry, using his experience at Starwood and elsewhere," wrote Crockett. "A bigger footprint could enhance this opportunity."
But Crockett also cautioned: "Buying on peak box office is a risk. We have built our AMC model as one consistent with our assumption that industry box office this year can defy skeptics and be up nearly 1 percent, versus a record 2015. The risk is that we are too optimistic, and our [financial] estimates come down."
He said that would have a "meaningful" effect, "because AMC's net [debt] leverage would go up ... with this deal." However, with Wanda's ownership "leverage risks might be muted, given the implicit backing of the Chinese conglomerate," he added.
B. Riley & Co. analyst Eric Wold in his report also highlighted the scale benefits. "Given the relative lack of new theater build opportunities in the U.S., we can understand the AMC board’s desire to drive scale and efficiencies through acquisitions, and we have stressed for some time that Carmike’s assets were significantly undervalued relative to both its peers and the [operating cash flow] growth opportunities within an attractive box-office environment."
He added: "Given minimal opportunity for new domestic screen growth (total screens in the U.S. have increased by only about 3 percent in total over the past 10 years), we have seen the major theater chains seek out acquisitions to gain scale and efficiencies — especially with attendance trends in the U.S. relatively flat."
He also argued that the acquisition "only helps to validate the conviction “buy” call that we made on the exhibitor group in mid-January given both stagnant valuation multiples at the time and lingering box-office and margin concerns that we believed were misplaced."
But Wold suggested that there could be a counter bid from a competitor under certain circumstances. "We believe the $30 per share proposed acquisition price for Carmike undervalues the company and the marquee assets of the fourth-largest domestic exhibitor — with a value per screen that is 18 percent below the average of comparable transactions over the past five years," he said. "Depending on the terms of the definitive agreement, we would not be surprised if competing bids emerged for Carmike."
And Wold said there are likely some regulatory issues AMC will have to deal with. "We have always believed there would be minimal theater/film zone overlap should AMC, Carmike or Regal move to acquire Carmike," he wrote. "Nevertheless, we would still expect the Justice Department to flex its muscles somewhat and require a modest number of theater divestitures for approval — although probably not to any level that would cause AMC to reconsider the transaction. Should AMC be successful in completing this acquisition, then we would likely see Carmike and/or Regal benefit from this divestiture as the most likely acquirer of those theaters (and probably at an attractive valuation)."