AMC Entertainment shakeout needs time

Some of the major stakeholders in stressed international cinema chain operator AMC Entertainment [NYSE:AMC] are in a wait-and-see mode as the long-term impact on the industry from the coronavirus pandemic remains unclear, two sources familiar with the matter said.
 
A roster of major US investment groups and China’s Dalian Wanda hold securities at different levels of the capital structure of AMC, the largest operator of movie theaters in the US.
 
Former AMC owner Apollo Global Management [NYSE:APO] has built up a large position in AMC’s senior term loan, this news service previously reported. Funds managed by Apollo have held pieces of the loan for some time, but the firm enlarged its position in March when the debt was trading at a steep discount.
 
Towards the other end of the capital structure sits tech-focused financial sponsor Silver Lake Partners, which acquired USD 600m in convertible notes in an investment in 2018. According to a recent 13D, Silver Lake’s convertible would give it a 31.2% stake in AMC’s Class A shares if exercised.
 
Beijing-based conglomerate Dalian Wanda, meanwhile, owns a close to 50% stake in AMC’s equity and has controlling voting rights over the company. Dalian purchased AMC from a group of private equity firms, including Apollo, in 2012 and took the company public a year later.
 
Under Dalian, AMC pursued an aggressive acquisition strategy. Now, with cinemas across the globe closed due to the coronavirus, AMC’s revenue has essentially disappeared. The company is delaying reporting 1Q20 financial results until June due to the disruption caused by the pandemic.
 
Shares of AMC have started to regain some ground since hitting lows of just above USD 2 in mid-April to close at USD 5.63 on Wednesday. The gains come even as AMC’s debt trades well below par with senior subordinated notes due 2027 last trading at a steep discount of 25.12, according to Finra.
 
At the end of 2019, AMC had approximately USD 4.9bn in long-term debt. Its market cap is around USD 584m.
 
AMC strengthened its liquidity profile last month to survive a continued closure of movie theaters with the issuance of a USD 500m senior secured bond with a 10.5% coupon. The senior bonds now are trading at around 85.50, indicating a disconnect between how debt and equity investors and valuing AMC’s future prospects.
 
As countries begin to reopen after lengthy lockdowns, it is not clear to what extent customers will return to cinemas, the second source cautioned. This source added that, if lockdowns continue in major population centers like New York or Los Angeles for longer than in the rest of the US, AMC and studios will not have access to the most lucrative markets, damaging theater operators even if a majority of overall locations are open.
 
The ongoing uncertainty raises broader questions about the entire cinema business model, the second source said. As the pandemic has taken its toll, some studios have turned to other distribution methods, with NBCUniversal, owned by telecom and media conglomerate Comcast [NASDAQ:CMCSA], distributing the new release Trolls World Tour directly to customers on release via video-on-demand.
 
Other studios have largely opted to push back their slate of releases into the end of this year or early next year. With the theatrical window of exclusivity broken in one case and studios staying away from cinema releases otherwise, cinema chains like AMC will have to hope that they can reopen enough locations to gain critical mass and take back some negotiating leverage, the second source said.
 
Still, the value proposition of theatrical runs is still high, with the small, core group of major box office hits every year deriving a large share of their revenue from the theatrical exhibition window, said James Goss, an analyst at Barrington Research. He also pointed to the strong incentive among auteur filmmakers to ensure that their movies see a theatrical release, which could ensure that movie theater operators maintain some leverage.
 
David Miller, a managing director at Imperial Capital, agreed, adding that it is telling that Universal decided to break the window with Trolls World Tour rather than a major tentpole franchise, most of which have simply seen their releases pushed back.
 
Goss said that the exhibitions business similarly relies on the small number of tentpole releases that drive the overwhelming majority of box office receipts every year, which ties the fate of the large cinema chains to this select group of titles. Trolls was estimated to generate about USD 95m in rental fees, according to the Wall Street Journal report; Avengers: Endgame grossed UD 350m domestically on its opening weekend.
 
AMC’s future depends on how this balance of power between studios and theater chains evolves, and how effectively the company can recoup some costs by cutting deals with landlords of its various properties, the second source and two sector advisors said. As these factors become clearer, AMC and Wanda can consider a range of possible routes forward, the second source said.
 
AMC, Apollo and Dalian Wanda did not respond to requests for comment. Silver Lake declined to comment.
 
by Jonathan Guilford and Will Caiger-Smith