The first rule of investing is “buy low, sell high.” Right now, few businesses are hitting lower lows than the movie theater industry, which could make it a great time to acquire a distressed asset ahead of a turnaround. That’s been true for the duration of the pandemic, and it’s still true now even as light can be dimly glimpsed at the end of the tunnel. The question is, is there an upside given the uncertain state of the entire film industry, and if so, for what kind of buyer?
These are hard times for the movie theater industry. Domestic ticket sales in the US were down 80% in 2020 to $2.2 billion from a 2019 haul of $11.4 billion, according to Comscore SCOR . You’d have to go back to the early 1980s to find a number that low. And industry leaders fear the hangover may persist even as the cloud of COVID-19 slowly starts to lift with the rollout of vaccines in 2021. Last week, Allan Reagan, CEO of the Flix Brewhouse chain of dine-in cinemas, suggested attendance might be down 15-25% on a permanent basis. That’s a big hit if your only business is exhibiting films.
Cineworld, the UK-based owner of the Regal Cinemas chain, averted bankruptcy by securing a financing deal good for up to $750 million in exchange for a 10% stake in the company. AMC tried to hang tough but eventually tapped Mudrick Capital Management for $100 million to make it through the pandemic – not enough cash to last very long, according to some analysts who suggest bankruptcy could be a better solution for the chain. Cinemark, the third-largest chain, saw a 96% drop in revenue in the third quarter of 2020 but is seen to be in a relatively stronger financial position than its rivals, and has been praised for its reopening plans.
Of the three, AMC is the hardest hit. The company’s shares dropped 70% this year. Its total market cap is under $460 million, and it’s still considered overvalued. Last May, during the early first peak of the pandemic, Amazon was rumored to be considering acquisition after looking hard at picking up the smaller art-house cinema chain Landmark Theaters in 2018.
Whatever AMC would have cost in May is probably quite a bit lower now. So what would be in it for Amazon or a similarly-situated buyer?
Even the most optimistic industry forecasts don’t project a turnaround until 2022 at least. That means anyone willing to throw theater operators a lifeline right now needs have a long term strategy for a business model whose short- and medium-term prospects face existential threats, including a potentially permanent shift in consumer behavior toward at-home viewing of new releases on streaming services. In the words of fellow Forbes contributor Gene Del Veccio, “Only Fools, Mad Geniuses and Daredevils Would Invest in a Theater Chain.”
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But Amazon is one of the drivers of that shift. Its own Amazon Prime Video service has become a major player in the streaming wars, with a growing collection of original films and series. Picking up a chain of theaters to cover out-of-home viewing is a good hedge in case market trends swing the other direction and post-pandemic audiences flock to out-of-home venues to be part of their communities again.
There are other upsides for buyers with patience, deep pockets and bigger plans. Movie theaters have big footprints in urban and suburban commercial centers. Amazon has been gradually increasing its physical presence with the acquisition of Whole Foods WFM and the expansion of Amazon Go! AMZN convenience stores and bookstores. Those physical locations are now serving as distribution and return points for merchandise ordered on Amazon.com AMZN . So could multiplexes.
Theaters have potential to become hubs for other kinds of social activities, as the rise of food and beverage-oriented chains like Flix demonstrate. With so many tentpole films based on properties with cross-media appeal, movie theaters have untapped potential as outlets for licensed merchandise. Other merchandise? That’s Amazon again. It’s very easy to see a vertically-integrated retailer build a good business around branded media-oriented merchandise and exclusive collectibles tied to movie franchises with installments playing on their screens.
The same logic applies to other potential buyers like Amazon’s retail competitors Wal-Mart and Target TGT , or to companies in the tech and streaming space such as Apple AAPL or Netflix NFLX . All those companies are flush with cash and riding high stock valuations going into 2021. The pricetag for AMC or one of the other distressed chains would look like pocket change, and could go less if conditions continue to remain rugged. Once things start to improve, a well-resourced parent company could also invest heavily in enhancements to the viewing experience along with other perks to get butts back in seats.
The upside for consumers is that movie theaters would still be there when we eventually pop the hatch on the quarantine and return to some semblance of normal life. If things continue to slide downhill for much longer, one or more of the top chains will throw in the towel, with potentially devastating consequences for the shopping centers, downtowns, and main streets anchored by multiplexes as well as for the film industry. And if that happens, it’s hard to see anyone re-investing capital to build up a global chain of cinemas from the ground up.
Theater chains are the bargain basement deal of the decade right now, but the price will be high indeed if they get left on the shelf.
Source: Forbes – Business