Wall Street Parses AMC Theatres' Plan for $500 Million "Near-Term Lifeline"

AMC Empire in New York City 1 — H 2020
Peter McClintock

Hollywood has been hopeful that many theaters could turn on the lights by the end of June.

With the White House on Thursday providing guidelines that would see movie theaters reopen once the coronavirus pandemic begins to subside with certain social distancing protocols and AMC Theatres unveiling a $500 million private debt deal plan, Wall Street analysts weighed in Friday on the exhibition sector, which has been hit hard by the virus crisis, and in particular AMC.

The sector biggie, controlled by China's Dalian Wanda Group, got a thumbs up from Street watchers for buying itself more time to potentially avoid a bankruptcy filing with the proposed capital injection, but many see its big debt load as remaining a key challenge for the firm.

Cinemas are mentioned in the proposed guidelines under a section on "large venues," which says they can reopen during "Phase One" if "strict physical distancing" is ensured and should be allowed to reopen during "Phase Two" with "moderate physical distancing protocols."

Hollywood has been hopeful that many theaters could turn on the lights by the end of June, but the National Association of Theatre Owners didn't immediately comment on the White House plan.

B. Riley FBR analyst Eric Wold in a Friday report called the plan "an incremental positive" for exhibitors before mentioning caveats. "While we believe this represented a positive headline for those sectors that have been most impacted during the 'stay at home' mandates (hospitality and entertainment), we still expect this to be a multi-month time line from this point in order to ensure the required protocols have been met; and avoid creating an environment for a second COVID-19 outbreak," he wrote. "The guidelines allow theaters to operate physical-distancing protocols that move from 'strict,' to 'moderate' and 'limited,' in three phases."

Wold's conclusion: "We remain comfortable with our expectation of a mid-June restart, with initially limited attendance (both due to social-distancing guidelines and consumer reluctance), and a film slate mostly composed of library content."

Wedbush Securities analyst Michael Pachter told THR on Friday that "the guidelines have zero impact on what will happen going forward," adding: "Theaters are no more likely to open on a date certain today than they were yesterday."

He explained: "It's a set of guidelines, and the first requirement is that the progression of the virus plateaus and then declines for 14 days. The second requirement is that governors agree. I don't see either of those happening in major metropolitan areas until June or July."

AMC's $500 million private debt raising plan also drew some analyst commentary Friday.

MKM Partners analyst Eric Handler in the headline of his Friday report said it "creates a near-term lifeline" for the company. "Assuming the deal is completed the threat of near-term bankruptcy gets eliminated," he said. "However, longer-term it does not solve the issue about adding more debt on top of an already levered balance sheet." Handler reiterated his "sell" rating and $1 price target on AMC shares.

Wold, who previously predicted that AMC would have to file for Chapter 11 bankruptcy by the summer, similarly said: "While this offering would address our liquidity concerns, it would not provide any added value for the [stock] in this uncertain demand environment." With management estimating liquidity to cover the company "through a partial reopening ahead of Thanksgiving, this confirms our estimated three to four months of liquidity, with this offering adding about three months," he said. 

Pachter highlighted that "AMC says it has enough cash to get through the second quarter and still felt compelled to borrow another $500 million yesterday to get it through Thanksgiving." His conclusion: "AMC’s actions are a lot more indicative of the state of affairs than the White House 'guidelines.'"

Wold on Friday also discussed what the U.S. reopening plans mean for other major exhibition chains that have major international businesses. 

Cinemark Holdings has a big Latin American operation, for example. "While we do not have any additional clarity on a reopening time line for the Latin American region, we note: The U.S. accounted for about 80 percent of 2019 segment-level revenue and operating income," Wold highlighted about the company. "The restart of the domestic market is key, in our opinion, to driving investor sentiment."

He added that management has confirmed its circuit's ability to operate profitably at low attendance levels and noted that a $250 million debt offering by Cinemark "improves the liquidity runway into the second half of 2021 without any revenue."

Imax Corp, meanwhile, has a big exposure to China. "With Imax operating under an asset-light intellectual property licensing model, any restart of the industry and generation of box office through its screens would drive nearly 100 percent contribution margins on that incremental box office revenue share," Wold highlighted. "And, with about 46 percent of the company's global installations located in China, we expect an earlier restart of the exhibition industry in China to give Imax a head start over the rest of the industry's restart time line."