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Shares of U.K.-based exhibition giant Cineworld Group dropped sharply on Wednesday following late Tuesday news that it was in advanced talks to acquire U.S. cinema powerhouse Regal Entertainment Group for around $3.6 billion.
As of 10 a.m. London time, the stock was down 15 percent at 5.905 pounds ($7.91).
Regal late Tuesday confirmed that it was “currently engaged in discussions with Cineworld Group about a possible all-cash acquisition of Regal at a price of $23.00 per share,” adding that “no agreement has been reached, and there is no assurance that any transaction will result.”
Cineworld on Wednesday morning also confirmed the talks in a statement, saying it would fund the deal through debt and a “material” share placement. It also said that major shareholder Global City Holdings, which owns a 28 percent stake in the company, would support the financing of a possible deal.
Cineworld emphasized that it was “finalizing due diligence in relation to a possible all-cash offer” and that it “would only proceed with the potential transaction in circumstances and on terms that it believes would be accretive to shareholder value.”
It also said: “Cineworld’s present strategy is to evaluate all opportunities to complement its organic growth. In keeping with this approach, it has continued to monitor possible selective acquisitions that have the potential to enhance its existing operations, and which allow it to expand into new markets. The potential acquisition of Regal would provide Cineworld with a highly attractive platform in the world’s largest cinema market.”
Cineworld was founded in 1995 and is now one of the leading exhibitors in Europe. Originally a private company, it re-registered as a public company in May 2006 and is listed on the London Stock Exchange.
Cineworld operates 2,217 screens across 232 sites in the U.K., Ireland, Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Romania and Israel and has the number one or number two position in terms of the number of screens in each of its regions.
Regal operates 7,315 screens at 561 venues in 43 U.S. states along with Guam, Saipan, American Samoa and the District of Columbia.
Analysts on Wednesday started weighing in on the possible mega-deal. “The price is likely right for Phil Anschutz,” who owns a 27 percent economic stake in Regal and controls 69 percent of the shareholder vote, said MKM Partners analyst Eric Handler. “Phil Anschutz is viewed as the key decision maker in approving a takeout offer. For the first time since Regal’s IPO in 2002, Phil Anschutz sold 25 million shares last year in block transactions in August and November at prices between $23-$24 per share. For this reason we believe he would agree to a $23 per share acquisition price as a means to monetize his remaining 42 million share position.”
He acknowledged that “we are a bit surprised Cineworld is the exhibitor to step forward and put forth an offer as it is a smaller company than Regal.” And he highlighted that a deal “is likely to significantly leverage its balance sheet.”
But he also argued that “scale matters” in the exhibition industry. “Acquiring Regal, in our opinion, represents the only way to gain size in one fell swoop, especially since Cinemark is likely too large for Cineworld to acquire and Wanda is probably not looking to sell AMC. Additionally, with other international operators, such as Kinepolis, CJV, Cinepolis and Cinemex all looking to expand in North America, acquiring Regal entrenches Cineworld as the number-two exhibitor in the market.”
B. Riley FBR analyst Eric Wold, meanwhile, argued that the takeover price offered could be too low given a drop in sector stocks this year amid box-office concerns, which may bring out additional suitors.
“Although Regal’s board previously explored strategic alternatives three years ago, we are somewhat surprised Regal would be in talks to be acquired at a valuation that, we believe, discounts the upcoming 2018/2019 film slate, as well as the projected improving cash flows to come from the theater remodel strategy,” he wrote in a report.
Added Wold: “We actually believe this could open the door for other bidders to emerge. At a minimum, we think this news highlights that exhibitor valuations have recently been driven more by a short-term/rearview mirror box office focus than by the long-term opportunity of the space, and it shows how attractive other exhibitor entry points may be at current levels.”