For years, Regal Entertainment Group has been one of the theater industry’s biggest buyers. But on Monday, the world’s largest circuit announced that it was entertaining the idea of being a seller, signalling that the consolidation boom that Regal helped accelerate could potentially claim the company itself.
Coming on the heels of Netflix’s recent move into the movie business and following the worst summer for the exhibition industry in more than a decade, Regal’s proclamation that it will explore a sale comes at a time of opportunity and upheaval.
“This is a reference point in what can happen in a fast-evolving digital landscape,” said Tuna Amobi, equity analyst at S&P Capital IQ. “The confluence of events created that perfect storm for them to gain as much valuation as they possibly could. They want to step out when the drumbeat is still loud.”
Regal CEO Amy Miles was tight-lipped about the issue on an earnings call Monday with analysts and media, only offering that the company’s board felt it was “an opportune time to conduct a thorough review of our options.” But in an interview with Variety for a lengthy profile earlier this month, Miles may have inadvertently explained why Regal shifted from bidder to acquisition target.
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“We’re all excited about the years 2015, 2016 and I’m going to be aggressive and say even 2017,” she told Variety at the time. “I think that (in the) environment of very healthy strong box office, it’s a natural time to think, ‘OK that might be a good time for an individual to exit.’ Value maximization happens in that environment.”
Indeed, the dates that Miles cited on that August day when she was still talking up the company’s cash-rich balance sheet and potential acquisition targets, are expected to be among the biggest ever for the exhibition industry. The next few years will bring sequels to “Avatar,” “Star Wars,” James Bond, “The Avengers” and “Jurassic Park,” as well as an onscreen matchup of Batman and Superman. It’s also in stark contrast to a summer of box office welterweights that drove Regal to a disappointing third quarter on Monday, with revenues and profits down sharply.
But, there’s more than just a popcorn flick-rich schedule prompting a possible sale. There’s also a number of deep-pocketed Asian companies that have been kicking the tires on Hollywood properties of late. Fresh off its initial public offering, Alibaba has money to burn, and its recent flirtation with Lionsgate demonstrates that it is interested in the entertainment business from the content side. Likewise, Fosun Group and SoftBank have also recently invested on the studio side, backing Jeff Robinov’s Studio 8 and Legendary Entertainment, respectively. A move into distribution might be attractive.
Plus, there’s a precedent here. The last blockbuster theater chain deal was the $2.6 billion that China’s Wanda Group shelled out to acquire AMC in 2012.
“My best guess is that this is them saying interest in our industry is high given the strong film slate coming in ’15 and ’16 and Chinese investors are circling Hollywood, so why not see what you can get,” said Eric Handler, managing director of media and entertainment at MKM Partners.
With 7,349 screens across 574 theaters and a market cap of $3.18 billion, Regal offers unparalleled access to American ticketbuyers. For chains such as Cinemark, Carmike and AMC, this might be the only chance to achieve a certain level of size and scale, even though a potential purchase could instigate regulatory battles.
“It’s an extremely attractive business…now is a good time for investors to get in when there’s a lot of upside,” said Matthew Harrigan, an analyst with Wunderlich Securities.
Most analysts were stunned that Regal would put itself on the auction block given that the company has often talked about its eagerness to vacuum up theater chains. In the past, Regal has made deals for the likes of Hollywood, Signature theaters and Hoyts Cinemas, and Miles told Variety last August that there were between 2,500 to 3,000 U.S. screens that would make attractive acquisitions.
“When acquisitions come up, you can pretty much guarantee we will at least have a seat at the table,” said Miles.
Regal may be shifting the seating order around that said table as a defensive measure. There are longer term trends that may lead investors to want to sell. Rising ticket prices continue to push theatrical revenue up, but attendance has been declining for decades. In fact the number of tickets sold dropped 11% from 2004 and 2013, according to a study by the Motion Picture Association of America, a 10-year period during which smartphones and videogames became more pervasive.
There are other troubling data points. In recent weeks, Netflix’s pact with Imax on a “Crouching Tiger, Hidden Dragon” sequel and multi-picture deal with Adam Sandler has reignited a fight over release windows. Exhibitors believe that shrinking the period between when a film hits theaters and when it debuts on home entertainment platforms is an existential threat.
“The dynamics of the industry are changing,” said Amobi. “They may have felt this was the time to get the best deal in light of all the uncertainty.”
While meeting with Variety last summer, Miles was quick to swat away any intimation that the exhibition industry was in decline.
“If you go back 30 years, it’s been peaks and valleys,” Miles says. “The good news is, we’ve worked ourselves up to higher peaks and higher valleys.”
However, Regal indicated Monday that even though the box office might be poised to rebound, someone else might be surveying the view from the next mountaintop.
