AMC’s (NYSE:AMC) Carmike Deal: The Benefits, The Risks
$AMC, $CMEC
Friday, Wall Street analysts started to comment on the benefits and regulatory risks of AMC Entertainment’s agreement to acquire Carmike Cinemas in a deal valued at $1.1-B.
The planned combination of AMC’s 5,426 screens with Carmike’s 2,954, expected to close by the end of the year, would create the biggest theater circuit in the US and the world.
Chinese conglomerate Dalian Wanda Group owns AMC, led by CEO Adam Aron, who became AMC CEO and president in January along with Legendary Entertainment.
The transaction appears accretive. We do not anticipate any significant divestitures from theatre overlap, but there could be some questions about AMC owning 18% of National CineMedia and Carmike’s 20% interest in Screenvision.
Regulatory watchdogs look at market by market concentration when it reviews theater deals. Overall size has never been a concern.
Best practices for concession sales will be interesting to watch, especially since Carmike generates an industry high per-capita spend of $4.84, which is nearly 5% higher than AMC’s per-capita spend of $4.62.
The strategic scale advantages.
In Y 2015, Regal, AMC, Cinemark, and Carmike had 16, 15, 14% market share respectively of North American theater attendance, and the deal would push AMC to the top spot with 20%.
AMC CEO Aron has spoken of meaningful opportunities to improve membership programs in the theater industry, using his experience at Starwood and elsewhere. A bigger footprint could enhance this opportunity
Buying on peak box office is a risk.
Our AMC model is based on the assumption that industry box office this year can defy skeptics and be up nearly 1%, Vs a record Y 2015. The risk is that we are too optimistic, and our estimates come down.
That means that AMC’s net debt leverage would go up with this deal.
However, with Wanda’s ownership leverage risks might be muted, given the implicit backing of the Chinese conglomerate.
The scale benefits.
Given the lack of new theater build opportunities in the US it is understandable that AMC board’s desires to drive scale and efficiencies through acquisitions, and we have stressed for some time that Carmike’s assets were significantly undervalued relative to both its peers and the operating cash flow growth opportunities within an attractive box-office environment.
Given minimal opportunity for new domestic screen growth, total screens in the US have increased by only about 3% in total over the past 10 years, we have seen the major theater chains seek out acquisitions to gain scale and efficiencies, especially with attendance trends in the US relatively flat.
Hang on, there could be a counter bid from a competitor under certain circumstances.
Some may see the $30/share proposed acquisition price for Carmike undervalues the company and the marquee assets of the fourth-largest domestic exhibitor with a value per screen that is 18% below the average of comparable transactions over the past five years.
So, depending on the terms of the definitive agreement, do not be surprised if competing bids emerged for Carmike.
There are likely some regulatory issues AMC will have to deal with.
Expect there to be a minimal theater/film zone overlap should AMC, Carmike or Regal move to acquire Carmike.
So, expect the US Justice Department to require a modest number of theater divestitures for approval although probably not to any level that would cause AMC to reconsider the transaction.
Should AMC be successful in completing this acquisition, then see Carmike and/or Regal benefit from this divestiture as the most likely acquirer of those theaters.
Have a terrific weekend.
Paul Ebeling
HeffX-LTN
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