Street still going to movies

Study: Exhibition biz is healthy

NEW YORK -- With the recent sluggish initial public offering of movie theater operator Cinemark Holdings Inc. and rival AMC Entertainment Inc. set to go public this week, Wall Street has of late had a closer eye on exhibitors and their financial outlook.

In a detailed report Monday, debt ratings agency Moody's Investors Service also weighed in on the health of the exhibition sector, arguing that a rejuvenated boxoffice and stable liquidity is set to keep theater groups in healthy financial shape, even though various challenges remain. Digital projection and 3-D also could add to their solid standing, the firm said.

Overall, this means that industry debt ratings should remain stable this year, with company-specific factors potentially affecting ratings of certain players, Moody's said.

"The sector's high leverage and propensity for shareholder-friendly returns keep ratings in speculative grade territory, but stable liquidity trends and the vitality of moviegoing as an entertainment option keep the industry afloat," Moody's analyst Karen Berckmann wrote in the report.

In general, the analyst suggested moviegoing remains a popular form of entertainment despite the expanding alternatives in the digital age.

"Notwithstanding the long-term secular pressure from ever-increasing options for consumer leisure time, improved home entertainment systems and increasing media fragmentation, movies still provide an affordable option for out-of-home entertainment, especially relative to sports events and concerts," Berckmann said.

One potential future draw for moviegoers is the current embrace of 3-D theater technology, she said. "Though the installed base is still small, Moody's considers Real D's three-dimensional film offering a potential driver for modest attendance gains," the analyst said.

She said Moody's will keep close tabs on this summer's boxoffice performance given several high-profile likely blockbusters, including "Spider-Man 3" and "Shrek the Third."

However, the analyst cautioned that "even if cinematic fare produces a record-breaking summer, it's unlikely to translate into (debt) ratings upgrades."

Cognizant of the overcapacity of screens and theaters that contributed to the exhibition bankruptcies seen between 1999-2001, Moody's also said it "remains vigilant about industry expansion and capacity as over-building, can be a red flag."

Counts for screens and theaters climbed in 2005 to exceed the 1999 peak for the first time, with Moody's estimates suggesting "a continued, although slightly more modest, uptick in screens and theaters in 2006," Berckmann wrote.

The credit agency expects exhibitors to continue to share their cash with shareholders via dividends. But it said it will monitor whether, for example, "the magnitude of dividends of AMC as a public company eats up the interest savings resulting from debt reduction, which would constrain any upward potential and could even pressure the corporate family (debt) rating if performance deteriorates."

As far as Regal Entertainment Group, the nation's largest exhibitor goes, its "favored strategy of directing free cash flow from operations to shareholders rather than to debt reduction constrains its (debt) ratings," Moody's added.

In her report, Berckmann also pointed out that the volatile nature of the boxoffice combined with high fixed costs remains a challenge for the indebted theater operators. "Operators continue to pay full rent expense as well as other nominal expenses, even when boxoffice bombs depress attendance," she wrote. "Rent expense continues to climb, reaching a weighted average of 14% of total revenue in 2006."

The expansion of digital projection should produce modest cash flow benefits for theater operators over time, according to Moody's, which estimates current digital penetration at 5%-10% of total domestic screens.

The credit agency's report also discussed the potential future of the boxoffice release window.

"While the elimination or a more severe narrowing of the window would materially damage the exhibitors' future prospects, we consider this outcome unlikely," analyst Berckmann wrote. "In our view, most producers regard the big screen as the best medium for their content, and studios need the exhibitors to advertise future movies via trailers, which reach a captive, targeted audience ideally suited to their message."

AMC is set to debut on the New York Stock Exchange under ticker symbol "AC" this week. The Kansas City, Mo.-based firm is set to offer 39.5 million shares as $18-$20 each.
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