Consolidation May Be Coming to a Screen Near You

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Far from killing the movie-exhibition industry, the pandemic may end up helping the big theater chains get even bigger.

Flush with money from sales of its soaring meme stock,

AMC

AMC 0.77%

Entertainment has clearly indicated it is shopping around. When the company landed a deal on June 1 to sell about $231 million worth of shares to Mudrick Capital, Chief Executive

Adam Aron

proclaimed that it is time for the largest theater operator in the U.S. to “go on the offense again.”

He noted at the time that the company was in discussions with multiple landlords to take over some theaters formerly operated by ArcLight Cinemas and Pacific Theatres.

That deal may be near done. The Los Angeles Times reported Tuesday that AMC was nearing a deal for “key” Pacific theaters in the area. Two of the theaters were even listed on AMC’s site and ticketing app for part of the day before being taken down, the paper reported. They are unlikely to be the last, considering AMC’s acquisitive history and now bulging coffers.

Chief Financial Officer

Sean Goodman

told a Credit Suisse investment conference this week that the company will end June “in the ballpark” of about $1.8 billion in cash, according to the broker’s report of the conference. AMC had about $308 million on its balance sheet at the end of 2020.

The wisdom of AMC pursuing more acquisitions is debatable. The company entered the pandemic with a ratio of net debt to earnings before interest, taxes, depreciation and amortization of 5.7 times at the end of 2019—twice that of competitor Cinemark, according to data from S&P Global Market Intelligence.

The AMC Lincoln Square 13 movie theater in New York.



Photo:

Jeenah Moon/Bloomberg News

Much of that stemmed from three acquisitions totaling about $3.2 billion in 2016 to 2017. AMC as a result was flirting with bankruptcy before the explosion of interest from retail investors ballooned the stock, which is now up more than 2,700% for the year. Eric Handler of MKM says AMC should use the new bounty to pay down its debt load that now totals about $5.5 billion, adding in a June 8 report that the company’s past deals have “produced subpar returns.” Mr. Aron has said AMC intends to use some of its funds to pay down debt.

Still, the opportunities may be tempting for all the major players. The National Association of Theatre Owners, or NATO, estimates about 125 exhibitors have closed permanently due to the pandemic. Emagine Entertainment, a privately held chain of 208 screens based in Michigan, has picked up four sites from competitors out of bankruptcy, according to Chief Executive Anthony LaVerde, also speaking at the Credit Suisse conference.

Cinemark has been conservative with M&A historically, but its CEO,

Mark Zoradi,

told the same conference that the company is “really open” to opportunistic deals in the current environment. He added, though, that “we’re not going to overpay for assets.”

Adding screens could theoretically boost the bargaining power of major theater operators with studios, at a time when shrinking release windows and soaring popularity of streaming services has muddled the long-term outlook for the industry. And the relatively strong performance of the few blockbuster-sized releases that have hit theaters so far this year has been an encouraging sign.

But it may take a lot of deals to have an impact. AMC, Cinemark and Cineworld’s Regal chain already control about 48% of U.S. screens combined, according to Wedbush analyst Alicia Reese. And most of the operators who have closed have fewer than 100 screens, according to NATO spokesman Patrick Corcoran. Ms. Reese says operators with between 50 and 250 screens would be most attractive to companies like AMC, Regal and Cinemark. But even adding 250 screens would boost each chain’s domestic market share by just one percentage point. Paying down debt may be safer, but it makes for a less exciting show.

The coronavirus pandemic shuttered every single AMC theater for months. But the pandemic isn’t the only thing pushing the company onto financially shaky ground. Photo Illustration: Jacob Reynolds/WSJ (Video from 11/30/20)

Corrections & Amplifications
The National Association of Theatre Owners was misspelled as National Association of Theater Owners in an earlier version of this article. Also, the last name of the group’s spokesman, Patrick Corcoran, was misspelled as Cochran. (Corrected on June 18)

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