Why Are International Companies Buying U.S. Cinema Chains?

MondayWeb_2018-02-12_ - H 2018

Amid soft box office and declining stocks, overseas exhibitors are seizing the opportunity to get a piece of the U.S. theatrical market: "Valuations are lower than we have seen in a couple years."

With Britain's Cineworld set to close its $3.6 billion acquisition of Regal Entertainment Group by the end of March, the two largest U.S. cinema operators by screen count will now be owned by foreign companies. 

China's Wanda in 2012, of course, closed its $2.6 billion takeover of AMC Theaters, the country's largest exhibitor. But U.S. cinema assets have also been attractive to buyers from other countries. 

In November, India’s largest cinema chain, PVR Cinemas, agreed to acquire a small stake in U.S. luxury cinema chain iPic Gold Class Entertainment, which operates 16 theaters with 121 screens, for $4 million in its first-ever investment in a foreign cinema chain.

In October, Mexican theater giant Cinemex's CMX Cinemas unit agreed to acquire Cobb Theatres, which has 25 existing locations and two under development. Cinemex, which overall has 316 sites with 2,728 screens, said the deal would make CMX the eighth-largest cinema chain in the country.

Fellow Mexican cinema group Cinepolis' USA unit has also been growing via acquisitions, such as its 2016 deal for a handful of Bow Tie Cinemas venues in New York, New Jersey and Connecticut.

And in December, Belgian exhibitor Kinepolis Group bought Canada's Landmark Cinemas, which operates 44 theaters with 303 screens, in a deal worth around $100 million, showing the appeal of broader North America for foreign companies. It said the deal, which took it to a total of 92 cinemas with 802 screens, "enables the group to enter a new market, characterized by healthy macroeconomic prospects, a growing population and a favorable business climate." It also highlighted that "entering a new continent creates a better geographic spread of Kinepolis' business activities and new growth opportunities, through acquisitions and new-build projects."

What's been driving the foreign acquisition wave? Experts cite the combination of Hollywood's glamour and the chance to develop a foothold in the largest film market for attractive prices. After all, the fact that U.S. exhibition stocks took a hit last year amid a softer box office made deals more affordable for buyers. One banker said that it also applies to privately held companies as their businesses and valuations are seen as affected by the same trends as those of their publicly listed peers.

"I think internationals are looking to buy now because valuations are lower than we have seen in a couple years," MKM Partners analyst Eric Handler told THR. "Timing is right, plus the U.S., while mature, is still the largest market in the world."

Cineworld CEO Mooky Greidinger emphasized that sentiment in unveiling his company's deal for Regal in December. "We have long had high respect for Regal and for its strong position in the largest box-office market in the world.... Regal is a great business and provides Cineworld with the optimal platform on which we can continue our growth strategy."

"The purchase represents the on-going strategy of CMX Cinemas to establish a major footprint within the motion picture exhibition industry in the United States," Cinemex said about its Cobb deal.

With content giants consolidating, such as Walt Disney's $52.4 billion deal for large parts of 21st Century Fox, cinema operators are looking to boost their bargaining power as well, analysts say. "Theaters need more scale and clout against major studios," Vogel Capital Management CEO and former entertainment industry analyst Hal Vogel told THR.

He argues that the "generational and tech shift" affecting the cinema sector is also making selling a more serious option for management teams. "The main thing is that ticket sales have been flat to down in many places," he tells THR. "Home video and mobile device viewing and cord cutting are factors."

But some observers, such as MoffettNathanson analyst Robert Fishman, have questioned the strategy of buying into the mature U.S. market.

"We are still trying to make sense why, given the growing risks for the exhibition industry, is any buyer today willing to pay a premium multiple for a U.S. circuit — especially Regal, which will require incremental investment," he wrote in a report dissecting Cineworld's Regal deal. "Obviously, and unfortunately, despite our increased conviction around the growing fundamental risks that lie ahead for the industry, this deal proves that our Regal 'sell' [stock rating] call was wrong. It seems that Cineworld is ignoring any of the lessons of AMC’s fall from grace, including levering up and unproven global scale benefits. Good luck."

He agreed that Cineworld has an opportunity to invest to enhance the U.S. theater experience in Regal venues, but cautioned that "we are not sure the total extent of Regal’s core circuit underperformance has been fully appreciated."

Is Cinemark, the third-largest U.S. cinema chain, which has a stock market value of about $4.3 billion, next in line for a buyout by a big foreign spender? "Given Cinemark is more expensive and not an under-investment story, it is unclear to us if any other international circuit would be willing to pay a significant premium to get more global scale, especially if Cinemark is unwilling to split its U.S. and Latin American assets," Fishman argued.

Fishman also pointed to the fact that its stock gained amid the Regal deal. "After the run in Cinemark shares post the Regal deal, we think the risk of downside substantially outweighs any possibility of an unexpected bid for the company," he argued.

Handler in a Jan. 24 report also suggested that Cinemark was more likely to acquire assets, like it has done in deals for Century Theaters, some Muvico Theaters venues and Rave Cinemas, as well as Hoyts in Argentina.

"Cinemark was not a participant in last year's industry M&A wave, which included a number of cross-border transactions," he said. "But it remains a key player given its strong balance sheet and cash flow generation.... Cinemark has built a strong acquisition track record."