After a flurry of acquisitions in the gaming industry, investors looking to get ahead of future deals may be wondering which industry faces consolidation next. The answer could lie in movie theaters.
Decree decreased
In 1948, the Supreme Court ruled in United States v. Paramount Pictures, Inc. that studios cannot own theaters due to antitrust laws. However, a federal judge granted The Department of Justice's motion to lift the "Paramount Decree" on August 7, 2020, starting a two-year sunset termination period.
After the decree ends in August 2022, movie studios like Disney (DIS 0.23%) may look to enter the theatrical distribution business the quickest way possible: acquiring movie theater operators.
Image source: Getty Images.
But why would studios acquire cineplexes when streaming is on the rise and brick-and-mortar movie exhibitors are struggling? For starters, blockbusters like Spider-Man: No Way Home are still making money at the box office -- raking in $1.69 billion worldwide to date. And instead of making 55% to 60% of the gross ticket sales, a studio could take the full 100%. Just 1% extra on a billion-dollar blockbuster would earn a studio an extra $10 million.
Alternatively, streaming services could get creative with their subscriptions by releasing blockbusters early or including tickets as part of its value proposition. Notably, Amazon.com and Netflix (NFLX 1.62%) don't have to comply with the "Paramount Decree" because "they didn't exist when the decrees were signed." In fact, Netflix already purchased Grauman's Egyptian Theatre in 2020. Disney purchased the El Capitan Theatre in the 1980s, but that required court proceedings at the time of purchase -- which will no longer be the case come August.
Potential targets
AMC Entertainment (AMC 0.61%) is the world's largest cinema chain, owning roughly 950 theatres, and its enterprise value -- deserved or not -- reflects that at roughly $16.7 billion. AMC gains some competitive advantage from its broader reach in international markets compared to its competitors, with approximately a third of its theatres in Europe and the Middle East. Since most blockbusters gross more money internationally -- Spider Man: No Way Home has made roughly 57% of its box office returns outside of the U.S. -- AMC may be a more attractive target than its domestically concentrated competitors.
Outside of AMC, publicly traded movie theater companies like Cinemark (CNK 0.31%) and The Marcus Corporation (MCS -0.77%) have been struggling over the past couple of years -- largely because of the pandemic.
Cinemark, at a $5.1 billion enterprise value, is a pure movie theater play, owning 524 theatres in the U.S. and Latin America. The Marcus Corporation, at a $1 billion enterprise value, owns or operates 85 theatres primarily in the Midwestern United States, but also owns or manages 19 hotels. Unlike AMC's "meme stock" rise, both Cinemark and The Marcus Corporation have seen their stocks cut in nearly half since the beginning of the pandemic, making both attractive to potential acquirers.
Why it might not happen
The movie theater business is in decline, and the top chains carry massive debt. Cinemark's total debt has ballooned from $2 billion to $3.9 billion over the past three years. And while AMC has been able to pay down some of its nearly $11 billion total debt by issuing more than 400 million new shares over the last two fiscal years, it still might be a tough pill for an acquirer to swallow.
Even before the pandemic, the theater industry sold 200 million fewer domestic tickets in 2019 compared to its highs in the early oughts. While movie theaters have been raising prices for years to compensate for the drop in ticket sales, there are no guarantees that moviegoers will return, especially as the pandemic seemingly continues into its third year. In fact, when CivicScience recently polled 60,000 Americans, 71% responded that they preferred watching something at home over going out to a movie.
Still, as streaming grows in popularity, studios covet box office sales. This year, HBO Max ended same-day releases for its Warner Bros. theatrical releases, creating a 45-day window of theatrical exclusivity. No example may be more telling than Paramount delaying the release of Top Gun: Maverick five times -- while reportedly refusing to sell the film to AppleTV+ and Netflix -- to see that its tentpole franchise has the opportunity to have a proper box office run.
What's next
If movie theaters are able to replicate the success of Spider Man: No Way Home in the first half of 2022 with slated blockbuster releases like The Batman and Top Gun: Maverick, don't be surprised if studios like Disney or the soon-to-be Warner Bros. Discovery can't resist a larger piece of their billion-dollar franchises' pie. Watch their actions closely after the "Paramount Decree" sunsets in August -- or even sooner, if Amazon and Netflix want to take advantage of a loophole.
As far as the most likely target, Cinemark appears to be the most attractive. While Cinemark doesn't offer the market penetration of AMC, its presence in Latin America could be attractive as Latin influences on Hollywood grow. And each Cinemark theatre works out to $9.7 million of the company's enterprise value -- the best and lowest per-theater value among its competitors.
