Regal Theater Chain Could Receive Bids From Asian, Other Foreign Companies: Analysts

Courtesy of AEG

"U.S. circuits [are] unlikely to be able to lead a bid," says one analyst, while China's Wanda already controls competitor AMC

Analysts on Tuesday debated the late Monday news that movie theater giant Regal Entertainment Group was exploring its strategic options, including a possible sale.

"With Regal reporting third-quarter revenues below expectations and pressures starting to develop from competitors' actions to gain box office market share, we believe the decision to seek strategic alternatives comes at a perfect time ahead of the 2015/2016 film slates and with clear interest in 'Hollywood' assets from deep-pocketed overseas buyers," said B. Riley analyst Eric Wold.

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Could the news lead to consolidation talk across the exhibition industry? "We do not believe this move by the board will spark any increased M&A activity around the exhibitor sector and are treating this as more of a one-off event," Wold said. He maintained his "neutral" rating on Regal's stock and increased his price target from $20 to $23.25 due to the deal potential.

MKM Partners analyst Eric Handler said in a note to investors: "We were definitely surprised by the news and had always viewed the company as a consolidator. In our opinion, this news most likely reflects a decision made by 50 percent owner Phil Anschutz rather than management to unlock greater value for the shares."

"The combination of near-peak valuation and relatively high leverage could make a deal with private equity (or publicly traded peers) difficult to achieve," Handler added, concluding: "A deep-pocketed international buyer seems more probable. Possible acquirers could come from Asia (China Film Group, Shanghai Film Group, CJ Corp) or Latin America (Cineopolis)."

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Stifel, Nicolaus analyst Benjamin Mogil in a report also focused on possible bidders.

"We see the major U.S. circuits as unlikely to be able to lead a bid," he said. "For foreign circuits, the size of the asset is large but we have seen in the past foreign exhibitors use big U.S. deals as once in a generation opportunities to enter the U.S. market in size."

He added: "Other North American exhibitors do not have the scale or capital to lead such a deal." His conclusion: "We do not see the company's leading U.S. competitors (Cinemark/AMC) as bidders given increased Department of Justice scrutiny on the industry and see them as likely participants in to be sold assets by the lead bidder."

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Mogil also pointed to Asian companies and players in other international markets. "Foreign exhibitors, excluding Wanda, are likely the targeted group" of bidders, he wrote. "This group would include UCI/Odeon, Reliance, CJ as possibilities. We would also see sovereign wealth funds as possible bidders."

China's Wanda "is likely out given its controlling stake in AMC," he explained, adding that the main challenge for other foreign sector players could be the price tag. "Many of these players have home markets, which are growing far more quickly than the U.S. market, particularly over a multiple year horizon," Mogil said. "However, as Wanda showed if one wants to be in the U.S., then there are few opportunities of size and certainly none as large as this deal."

Summarized the analyst: "We see the U.S. circuits as bidders of some divested assets, while we do not view controlling shareholder Anschutz as a bidder other than in a stalking horse position."

He has a "buy" recommendation on Regal's stock.

Email: Georg.Szalai@THR.com
Twitter: @georgszalai

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