Some rays of hope have shined down on AMC Entertainment (AMC -5.61%) investors recently. First, Black Panther became the huge blockbuster the theater industry needed coming off a weak 2017 box office. Next, AMC was reported to be in talks to spin off a portion of its European theater chain, which could help it pay off a portion of its $4.9 billion debt load.
And most recently, the company announced an exclusive partnership with the Saudi Arabia Development and Investment Entertainment Company (a subsidiary of the Public Investment Fund), to launch movie theaters in Saudi Arabia, a large market that's just opening up its economy. Here are the details surrounding the historic deal and what it could mean for AMC.
Art of the deal
The deal is actually rather historic, as Saudi Arabia is lifting its 35 year-old ban on movie theaters in the country as part of Crown Prince Mohammed bin Salman's Vision 2030 plan. Vision 2030 aims to liberalize the country and diversify its economy away from fossil fuels. By lifting the ban, Saudi Arabia hopes to spur spending and job creation, boosting entertainment from about 3% of household spending to 6%. That includes a vision for 350 theaters housing 2,500 screens in the country by 2030. The company plans to open the first theater with AMC in Riyadh on April 18.
AMC will be a big part of that theater count, as it envisions opening 30 to 40 cinemas over the next five years in 15 cities, growing to 50 to 100 theaters by 2030. That would be less than one-third of the projected theater count, although AMC says it aims to have 50% market share in the country, which means it will probably operate the largest, highest-grossing theaters in major cities, as it does in the U.S.
How big for AMC?
AMC believes Saudi Arabia, with its 32 million people, many under the age of 30, has the potential to be a $1 billion cinema market. I'm not sure if that includes food and beverage and/or total box office (which theaters split with studios). Assuming that's just the amount theater chains could get (half of the box office, plus food and beverages), if AMC were to achieve 50% market share, it would mean another $500 million in revenue, which would increase its top line by nearly 10% over 2017.
Of course, it's unclear how much of the profits AMC would see, as it appears to be co-investing with the Saudi Public Development and Investment Company. Any profit-sharing terms were not disclosed.
The move follows the geographic diversification strategy that AMC has led in the cinema industry. The modern AMC itself is the result of a 2012 acquisition by the Wanda Group of China, which still owns a majority in the company after its 2013 IPO. AMC then acquired Carmike Cinemas in the U.S. (a regional chain) in 2016, then set its sights on Europe, buying Western European theater chain Odeon in late 2016, then Eastern European chain Nordic Cinemas in early 2017.
The Saudi Arabia push isn't an acquisition but organic co-investment, but it still continues the same trend: AMC is looking to roll up the global theater industry, then upgrade theaters to deluxe recliner seating and upgraded food and beverage where the company can get the highest returns.
That's what makes AMC perhaps a more interesting and controversial bet than other theater chains -- aggressive acquisitions, diversification, and theater renovations -- all fueled with lots of debt. That debt load is why AMC's stock has nearly been halved from a year ago, but if its growth initiatives pay off, the upside could be substantial. I think risk-tolerant investors should give AMC a fresh look after a rough 2017.