Say this for major Chinese conglomerates -- they don't think small. Dalian Wanda Group caused a stir in the entertainment industry after its recently announced buyout of America's No. 2 cinema chain, the privately held AMC Entertainment. Wanda paid a substantial premium for its new U.S. asset, providing a nice jolt to the stock prices of AMC's publicly traded rivals. Judging from how much the Chinese firm was willing to spend, though, one or several could have significant upside left in their shares.
The $500,000 screen
The $2.6 billion Wanda doled out for AMC equates to around $515,000 per screen for the company's chain of theaters. Meanwhile, based on its most recent set of annual results AMC brought in, on average, revenue of $480,000 per screen. So Wanda paid nearly 1.1 times per screen take to make the American company its own.
That would value some of the competition richly. The metrics for No. 1 theater chain Regal
Multiplying that per-screen cost by the number of Regal's theaters equals $2.9 billion. This would be a solid takeover premium, considering Regal's current market cap of $2.2 billion. On a per-share basis, that $2.9 billion would equate to $18.68. Put another way, that's a 30% premium to the recent share price of $14.37.
The results for competitors Cinemark
|
Company |
FY Per-Screen Revenue |
Wanda Multiple |
No. of Company Screens |
Total |
Total Per Share |
Recent Stock Price |
Recent Market Cap |
|---|---|---|---|---|---|---|---|
| Regal | $407,120 | $436,860 | 6,587 | $2.9 billion | $18.68 | $14.37 | $2.2 billion |
| Cinemark | $439,995 | $472,136 | 5,181 | $2.4 billion | $21.62 | $23.45 | $2.6 billion |
| Carmike | $213,935 | $229,563 | 2,254 | $517 million | $29.22 | $14.20 | $262 million |
| Marcus* | $551,170 | $591,432 | 684 | $405 million | $13.80 | $13.23 | $378 million |
| IMAX | $373,117 | $400,373 | 634 | $254 million | $3.87 | $21.69 | $1.4 billion |
Source: Yahoo! Finance.
*Figures include non-cinema operations (currently 45.4% of total revenues).
On the assumption that Wanda has set some kind of standard premium for movie theater chain buyouts, Carmike is the most significantly undervalued among the bunch. A Wanda-level acquisition would price it at around $517 million, or nearly twice its present market cap. This works out to a healthy per-share premium of over $14, which is awfully good for a stock that currently costs just under $15.
In addition, that sub-$1 billion market cap puts it at an attractive level for a potential new owner. The company isn't a biggie like Cinemark or Regal, but it still boasts more than 2,200 screens nationwide. However, those screens tend to be in smaller locales than those of the company's rivals, which is probably one big reason its per-screen revenue metric lags its rivals. In addition, the company's two-year estimated EPS growth is only 14%, the lowest of its peer group.
How it plays in other theaters
Applying the Wanda multiple to the three remaining companies would result in a discount to share price/market cap. The steepest markdown belongs to IMAX because it's a seriously pricey stock on nearly every comparable metric; P/E, for example, is over 75, as opposed to Carmike's 14, Cinemark's 18, or Regal's 20. IMAX has been an investor darling for quite some time, and coincidentally enough, it's traded up recently on the back of potential deals in China.
There are other reasons the three stragglers wouldn't make good acquisition targets. Cinemark is too expensive, and Wanda might balk at handing over a $2.4 billion check to grab the company. That's nearly the amount Wanda paid for AMC, and for fewer screens (at the end of its most recent fiscal year, Cinemark had 5,181, a shade under AMC's 5,203).
Unlike most of its peer group in this low-margin business -- thank you, heavy first-run distributor fees! -- Marcus has managed to squeeze out a profit in recent quarters and fiscal years, indicating a good management regime. But that's because it isn't a pure play; in addition to its cinemas, the company also operates hotels, resorts, and other such properties. At the moment, only around 55% of Marcus' revenues are derived from movie theaters, so as a mixed company it's probably not prime takeover bait.
A most compelling film
The recent AMC takeover has no doubt drawn some interest to the cinema segment for potential acquirers. It's a tough business, and its companies fight to stay profitable and keep their stock prices up. If that outside interest grows more intense, though, look for at least one of the better-valued operators to cash out at a nice premium. Let's break out the popcorn, take a seat, and watch the show; this story has the potential to get very interesting, not to mention lucrative.
Cinema exhibition isn't the only entertainment sector with good upside potential. We've pegged a company in the tech sphere that's well poised to take advantage of current trends. Find out which company that is in our free report "The Next Trillion-Dollar Revolution." You can download a copy.
