AMC to Bring Reclining Seats, Enhanced Food Offerings to Odeon & UCI Cinemas

Movie Theater Audience - H 2012
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Movie Theater Audience - H 2012

"The market is ripe for upgrades," says one analyst about Europe.

AMC Entertainment's $1.2 billion deal to acquire Europe's largest exhibitor Odeon & UCI Cinemas will see the cinema giant bring its U.S. "reseating," premium formats and food and beverage upgrade strategy to the U.K. and other markets to boost attendance and financial performance, according to Wall Street analysts.

AMC in a conference call with analysts said Tuesday that it expects only about $10 million in cost synergies, but CEO Adam Aron predicted a 50 percent increase in Odeon & UCI's earnings before interest, taxes, depreciation and amortization (EBITDA) over four years from revenue synergies.

Those will come from "mainly taking the proven re-seat formula to Odeon that AMC has successfully executed in the U.S.," FBR analyst Barton Crockett said in a report. "This could be an innovation in a European continent that has not yet seen much of this."

Echoed Wedbush Securities analyst Michael Pachter: "The growth AMC anticipates will primarily come from theater upgrades as the market is ripe for upgrades. ... Upgrades will include recliner seating installations in 50-60 theaters over the next five years, with food and beverage upgrades in many, if not all, of these theaters."

He added: "AMC also intends to install alcohol service bars and dine-in theaters where appropriate throughout the footprint. Importantly, we expect AMC to facilitate a major expansion of Imax and Dolby premium large-format theaters throughout Europe, as well as its own private PLF screens, which are currently under development. We believe that, with the boost in attendance and revenue from recliner upgrades, as well as concessions revenue growth accompanying the food & beverage enhancements in AMC's domestic theaters, AMC has the knowledge and expertise to successfully upgrade the European theater market and benefit greatly from it."

Overall, Pachter expects the Odeon & UCI acquisition to be "mildly accretive in 2017 and begin providing substantial EBITDA growth in 2018."

MKM Partners analyst Eric Handler said being owned by private equity firm Terra Firma has meant that Odeon "has had limited ability to reinvest capital into the business. Accordingly, it appears Odeon has been generating sub-par margins and has likely lost share to other operators with newer facilities."

He added: "A margin for Odeon in line with AMC of 18.0 percent would have added more than $50 million of EBITDA last year."

Addressing the European competition, Handler wrote: "Although a number of exhibitors within the European exhibition market have started to implement a theatre renovation strategy, we believe these initiatives have occurred at a much slower pace than what has unfolded in North America. We have also yet to come across an operator moving forward with luxury, reclining seats, which gives AMC the first-mover advantage."

Odeon is Europe's largest exhibitor with 242 theaters and 2,236 screens. It operates in Britain (866 screens), Spain (535 screens), Italy (472 screens), Germany (203 screens), Ireland (77 screens), Portugal (45 screens), and Austria (38 screens).