AMC's Debt Ratings Outlook Turns "Negative" on Odeon Acquisition, Moody's Says
"It will increase leverage, expand the company’s exposure to currency volatility and heighten execution risk," says an analyst.
Movie theater giant AMC Entertainment’s planned acquisition of Odeon & UCI Cinemas, Europe's largest exhibitor, is "credit negative," Moody's analyst Jason Cuomo said in a Tuesday report, downgrading his outlook for the company's debt ratings.
Moody's now has a "negative" outlook instead of a "stable" one, meaning it is more likely to downgrade its ratings on AMC's debt.
Earlier in the month, AMC said that it has agreed to acquire Odeon & UCI for $1.2 billion in cash and stock, excluding fees and other transaction costs. "The planned debt-funded transaction is credit negative for AMC, because it will increase leverage, expand the company’s exposure to currency volatility and heighten execution risk ahead of the simultaneous closing of its $1.1 billion acquisition of Carmike Cinemas," Cuomo explained.
Pro forma for the Odeon and Carmike acquisitions, the analyst expects AMC's debt-to-operating cash flow leverage to be about 5.5 times, up from 4.8 times. "The company is challenged by a dependence on a limited number of movie studios, unpredictable box-office results and emerging competitive threats," he also noted.
But Cuomo also highlighted various positives. "The Odeon transaction, in combination with Carmike, strengthens AMC’s competitive position by increasing its scale and geographic diversification," he wrote. "With Odeon, we expect that well over 25 percent of the company’s revenue, attendance and circuit assets will reside outside the U.S."
In addition, Cuomo said that "the new assets establish an underserved European platform to expand and capitalize on its successful operational U.S. initiatives to upgrade the customer experience with luxury seating, enhanced dining and premium audio and visual equipment."
He concluded: "The company benefits from barriers to entry into the first-run window for theatrical distribution, pricing power, high margins and good liquidity."