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Is Regal Cinema's $5.8 Billion Buyout a Risky Play?

By Rich Duprey - Dec 14, 2017 at 10:16AM

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Here's a close look at the implications of the buyout.

U.K.-based Cineworld is making a bid to become the second-largest movie theater operator by buying U.S. rival Regal Entertainment (NYSE: RGC) in a $5.8 billion deal that would give it 9,500 screens across the U.S. and Europe.

The merger is part of a larger wave of consolidation that is occurring in theaters, mostly driven by China's Dalian Wanda Group, which purchased AMC Entertainment (AMC -0.15%) in 2012 for $2.6 billion, and then had the division snap up Europe's Odeon and UCI chains in November of last year, followed by U.S. operator Carmike Cinema in December. The buying spree ended up creating the world's largest movie theater operator, with over 900 theaters and 10,500 screens in eight countries.

Vintage movie projector

Image source: Getty Images.

A bet Hollywood survives the test

Cineworld's deal for Regal, which will see the U.K. operator pay Regal shareholders $23 a share for their stock, is certainly an opportunistic move. The U.S. movie market was torched by a horrible Hollywood summer for blockbusters, which was the worst period for the industry since 2006. Shares of Regal were down about 20% before the first news of a deal was heard, while AMC has lost 56% of its value this year.

Cineworld is offering to pay $3.6 billion for Regal, plus $2.2 billion worth of its debt, and will finance the deal through a rights offering to issue more shares. When Cineworld announced it was in talks to buy Regal, the theater operator's stock plunged 20% on the news.

The merger looks like a bet not only on Hollywood rebounding, but also being able to stave off the streaming threat posed by Netflix (NFLX 2.90%) and Amazon.com. Operators have been upgrading their theaters by adding new amenities, such as premium reclining seats and dine-in options.

A premium experience

Regal, which has over 7,300 screens in 561 theatres, has installed recliners in 151 theaters and expects to have them installed in 45% of screens by the end of next year. It's also upgraded its menu to include more and better food and alcoholic beverage options, but in the third quarter concession sales fell 3% even as per patron revenue rose almost 6% due to price increases.

People eating popcorn at a movie theater

Image source: Getty Images.

Getting people to pay more is important, as concession sales account for 30% of Regal's total revenue. It's not much different at AMC, where food and beverage sales represent 31% of revenue.

AMC has 1,006 theaters and 11,046 screens, and has become the leader in creating a premium movie-going experience. Over 2,400 of its screens have premium seating, 430 have dine-in amenities, and hundreds more offer IMAX 3-D or Dolby Cinema capabilities.

Yet the upgrading costs have taken a toll on the theater operators, particularly as Hollywood bombed this year. While that's seen as part of the ebb and flow of the industry -- 2016 was a record year for box office sales -- the bigger threat is streaming.

A different kind of competitor

For one, Netflix has promised to upend how content is distributed. Rather than going through theaters first before getting to the streaming services, Netflix plans to produce its own feature-length films and stream them directly to its members.

Considering Netflix's original TV programming has caused people to cut the cord with cable, there's good reason the movie industry is worried. Doubling down on the theater business, as Cineworld is essentially doing, just as Netflix attempts to upend movie distribution, could be as risky as trying to produce a blockbuster by maxing out your credit cards (a method used by producers of Blair Witch Project).

Sometimes it pays off, as it did for those who made the Blair Witch Project, but more often than not it leads to failure and a mountain of debt. In the Cineworld-Regal Entertainment merger, it could be investors end up only with heavily diluted shares.

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Netflix, Inc. Stock Quote
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Dolby Laboratories, Inc.
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IMAX Corporation Stock Quote
IMAX Corporation
IMAX
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AMC
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