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The emerging narrative on Wall Street about AMC Theatres, North America’s largest cinema circuit, is that the company may be on the brink of bankruptcy amid the coronavirus pandemic.
The theater chain’s hefty debt load is trading at highly distressed levels, and analysts have sounded the alarm that “AMC has minimal liquidity options to make it through” the virus crisis, recommending investors sell off stock before the exhibition giant files for Chapter 11 protection.
One especially interested party, however, has expressed distain for that estimation: Dalian Wanda Group, the Chinese conglomerate that has been AMC’s largest shareholder since a historic $2.6 billion cross-border buyout in 2012.
“The recent online media speculation that Wanda’s AMC is filing for bankruptcy is pure rumor,” Wanda said Tuesday in a statement on its Chinese-language website hours after the New York Post reported that AMC’s executive team was in talks to hire bankruptcy lawyers.
The statement out of Beijing reignites an urgent question for AMC shareholders and industry watchers alike: Could Wanda, headed by mercurial billionaire Wang Jianlin, move to execute a last-minute rescue?
AMC Entertainment, led by CEO Adam Aron, is the world’s largest theatrical film exhibitor by screen total. During the early phase of Wanda’s ownership, AMC pursued an aggressive expansion strategy, buying out U.S. rival Carmike Cinemas for $1.1 billion in cash in April 2016, then snatching up London-based Odeon & UCI Cinemas Group for $1.2 billion later that year. The company also invested heavily in upgrading its growing network of theaters, installing plush recliner seats — the kind that are standard in China’s newly built multiplexes.
Aron has always insisted that AMC had Wanda’s express support but acted with operational independence from Beijing. Still, the Chinese conglomerate, which was then the Middle Kingdom’s most successful commercial property developer, was always thought to be encouraging the buying spree. Should AMC run into trouble, it was assumed that Wanda — with its seemingly unlimited access to capital in China — would provide a backstop.
How about now?
The severity of AMC’s current challenges is of little doubt. The firm’s shares have lost 70 percent of their value this year, and much of its $4.9 billion debt is trading at about 30 cents on the dollar. With the coronavirus shutting down most of Europe and North America, AMC has been forced to shutter more than 1,000 theaters and furlough all of its 24,000 staff in the U.S., including 600 corporate employees (as well as Aron). The company’s debt woes are compounded by quarterly commitments of around $250 million for rent at its theater locations.
If Wanda wants to play the white knight, though, there are myriad factors possibly blocking it from doing so, analysts say.
“You have a perfect storm of conditions to prevent Wanda from bailing out AMC in this situation,” notes Stephen Saltzman, chair of the Asia entertainment practice at law firm Paul Hastings. He explains: “Wanda has its own financial distress to deal with back in China; there are existing restrictions on moving foreign currency out of the country; and injecting money into an American company while China is trying to make its own coronavirus recovery — that could be politically unpalatable in the current environment.”
Beginning around 2015, Wanda embarked on a breathless global buying blitz, snapping up Burbank-based Legendary Entertainment for the questionable sum of $3.5 billion, building China’s largest domestic film studio complex and pouring billions into luxury real estate projects in Beverly Hills, London, Madrid, Chicago, Sydney and elsewhere. At the height of its acquisitiveness in late 2016, Wanda’s Wang, then China’s richest man, boasted of wanting to buy equity stakes in all six of the major Hollywood studios, and announced a rich $1 billion deal for Dick Clark Productions, producer of the Golden Globes. (Dick Clark is owned by Valence Media, which also owns The Hollywood Reporter.)
Worried about capital flight and the quality of the international deals Chinese firms were doing, Beijing soon hit the breaks, instituting strict controls on currency outflows and limiting private conglomerates’ ability to tap financing at state banks. Facing a huge, sudden debt crunch — as well as the umbrage of the powers that be in Beijing — Wang and Wanda reversed course, selling overseas holdings and even paring their domestic Chinese entertainment outlay, such as the huge movie studio in Qingdao and a network of amusement park developments (sold in a record-setting $9.3 billion deal). Wang’s final deal for Dick Clark Productions was eventually scrapped, with Wanda forced to shell out a $50 million breakup fee.
Since that period, Donald Trump’s trade war with China has only further dampened enthusiasm in Beijing for outbound investment into the U.S. entertainment and media sectors.
Through it all, AMC and Legendary were among the very few overseas holdings that Wanda didn’t unload. Wang did ink a deal in late 2018 with Silver Lake Capital to reduce its economic stake in AMC — but the tycoon still retained control. As of Dec. 31, 2019, Wanda owned approximately 49.85 percent of AMC’s outstanding common stock, but held 74.89 percent of the combined voting power. Wanda insider Lin Zhang, once Wang’s vp, chairs AMC’s 11-seat board.
Asked whether Wanda could conceivably save AMC, Wedbush Securities analyst Michael Pachter tells THR: “They ‘could,’ but it would require cash outflow from China to a foreign business, and Wanda was limited in its ability to further invest by the Chinese government a couple of years ago.”
“The government might reconsider in order to allow Wanda to protect its investment,” Pachter adds, “but it’s far from certain that they would do so” considering ongoing China-U.S. trade tensions and Wanda’s own diminished reputation among Beijing officialdom.
And even if Wanda were to get Beijing’s greenlight to move the money, does the company have enough cash at hand to match AMC’s needs?
Wanda also owns China’s biggest domestic movie theater circuit, Wanda Cinema Line, plus a major production and distribution company. Those businesses are hurting for the same reasons that AMC and the Hollywood studios are — only more so, since the coronavirus epidemic closed Chinese theaters in late January, weeks before North America’s shutdown in March.
Prior to the coronavirus epidemic, Wanda’s publicly traded film studio and movie theater unit, Wanda Film Holdings, had been looking to raise approximately 4 billion RMB ($560 million) via a convertible bond issue — not exactly an indicator of abundant capital at hand. The fundraising push was set aside once the coronavirus shut down local businesses, sources in the Beijing banking community tell THR. On Tuesday, Wanda Film reported a net loss of RMB 550 million to 650 million ($79 million to $92 million) in the first quarter of 2020, down from a net profit of RMB 400.6 million ($58 million) during the same period last year.
Wanda’s core commercial property business also has answered the government’s call to large private firms to aid in China’s coronavirus response. The company has been offering many of its commercial real estate tenants rent relief to help prevent them from going under — something that is likely to already have cost the conglomerate enormous sums.
Wanda’s chairman Wang is famous in China for his determination, but at every dealmaking opportunity over the past two years, he has indicated a desire to drive down offshore equity holdings. Just last month, Wanda Group’s independently listed sports unit agreed to sell the Ironman franchise for $730 million, after buying it for $650 million in 2015.
“There’s always the possibility of a takeout when the equity becomes this depressed,” says Macquarie Capital analyst Chad Beynon, noting how far AMC’s market value has fallen. “But given that Wanda has been diluting themselves during the last year, [such as in the] Silver Lake sale of [AMC shares], we don’t see this happening.”
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