Pssst, wanna buy a movie theater chain?
If yes, then AMC Entertainment Holdings (NYSE:AMC) might be the company to talk to. A recent article in Reuters, citing three "sources familiar with the matter," has it that the world's top cinema operator is in the process of unloading its Odeon Cinemas Group unit. Given that AMC is in asset-sale mode, this isn't a huge surprise. But I doubt it'll bring the company much benefit.
Silver screen sales
According to the article, AMC is working with Citigroup (NYSE:C) on an initial public offering (IPO) spin-out of UK-based Odeon. This could value the chain -- which includes fellow European movie theater operator Nordic Cinema -- at around $2 billion.
AMC could certainly use the money. Look how its long-term debt has ballooned lately:
That sharp rise was due mainly to acquisitions. In fact, Odeon is a recent one; the company bought it in mid-2016 in a splashy deal valued at the equivalent of just over $1.2 billion at the time. And this was soon followed by AMC's purchase of big U.S. movie theater chain Carmike at a similar price. These moves made AMC the largest cinema operator on the planet.
Mere months after the handshakes and champagne toasts saluting these deals, the Chinese government ruined the party. It ordered the country's biggest financial institutions to stop financing foreign deals wangled by big domestic conglomerates. Dalian Wanda Group -- the controlling shareholder of AMC -- was on that short list of companies.
So in the face of mounting debt and pressure from the government/big lenders, AMC has reversed its strategy, and now it's shedding assets instead of bulking up. This began in earnest last summer with the sale of the company's 50% stake in Open Road Films, a movie distributor it co-founded with peer cinema chain operator Regal Entertainment Group.
Assuming the Reuters story checks out and AMC/Citigroup ends up selling Odeon in an effective way, whether by IPO or other means, the company should reap a half-decent profit on its investment.
Unfortunately, it's not likely to make the most sensible move with that cash -- retire debt. AMC has become fond of spending its money on greater theater comforts, chiefly sets of well-stuffed, reclining seats. Fifty-five theaters are to receive the recliner makeover this year, the same level as in 2017, in a building-and-renovation project that will cost a net $400 million to $500 million according to the company's estimates.
CEO Adam Aron touts the apparent 25%-plus returns on the new comfy environs, compared to the approximate 6% interest it's paying on the debt. Even if such lofty profits are there for the taking, though, it might be some time before they filter down to the bottom line. It almost goes without saying, by the way, that the company has been unprofitable lately.
It seems AMC would rather do almost anything with its cash than take care of that debt. It's determined to maintain its $0.20 per share quarterly dividend, which costs it around $100 million per year. Not to be outdone by this, in mid-2017 the company launched a two-year, $100 million share buyback program.
Meanwhile, zooming out we see an industry that isn't growing at the moment -- hardly a shock given the rising popularity of increasingly well-stocked streaming video services. According to data compiled by Box Office Mojo, total box office receipts this year are down by nearly 4% from the same period of 2017.
Bad movie moves
I don't feel that AMC is being managed in a clever way, with sensible moves that could bring sustained growth in the future. The sale of Odeon, particularly if led by an experienced IPO hand like Citigroup, will provide an excellent chance to at least partially fix an increasingly wobbly balance sheet. It's too bad the company probably won't take it.