After a wave of acquisitions in the gaming industry, investors looking to get ahead of future deals may wonder which industry will face consolidation next. The answer may lie in movie theaters.
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 Justice Department’s motion to lift the “supreme decree” on August 7, 2020, beginning a two-year termination period.
After the end of the decree in August 2022, film studios like disney (NYSE: DIS) may seek to enter the theatrical distribution business in the fastest way possible: acquiring movie theater exhibitors.
But why would studios buy cineplexes when streaming is on the rise and physical movie exhibitors are struggling? For starters, blockbusters like Spider-Man: No Coming Home are still making money at the box office – grossing $1.69 billion worldwide to date. And instead of making 55% to 60% of gross ticket sales, a studio could take the entire 100%. Just 1% more 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. Especially, Amazon.co.uk and netflix (NASDAQ:NFLX) do not have to comply with the “supreme decree” because “they did not exist when the decrees were signed”. In fact, Netflix already bought the Egyptian theater from Grauman in 2020. Disney bought the El Capitan theater in the 1980s, but it required legal proceedings at the time of the purchase, which will no longer be the case in August .
AMC Entertainment (NYSE: AMC) is the largest cinema chain in the world, owning around 950 screens, and its enterprise value – earned or not – reflects that at around $16.7 billion. AMC derives some competitive advantage from its wider reach in international markets compared to its competitors, with about a third of its theaters in Europe and the Middle East. Since most blockbusters make more money internationally – Spider Man: No Coming Home earned about 57% of its box office returns outside of the United States – AMC may be a more attractive target than its domestically focused rivals.
Outside of AMC, publicly traded movie companies like Cinemark (NYSE: CNK) and The Marcus Company (NYSE:MCS) have struggled over the past two years, largely due to the pandemic.
Cinemark, with an enterprise value of $5.1 billion, is a pure piece of cinema, owning 524 theaters in the United States and Latin America. The Marcus Corporation, with an enterprise value of $1 billion, owns or operates 85 theaters primarily in the Midwestern United States, but also owns or operates 19 hotels. Unlike the rise in AMC’s “meme stock,” Cinemark and The Marcus Corporation have seen their shares cut nearly in half since the pandemic began, making them attractive to potential buyers.
Why it might not happen
The cinema sector is in decline and the big chains are extremely indebted. Cinemark’s total debt has grown from $2 billion to $3.9 billion over the past three years. And while AMC has been able to pay off some of its nearly $11 billion in total debt by issuing more than 400 million new shares over the past two fiscal years, that could still be a tough pill to swallow for an acquirer.
Even before the pandemic, the theater industry sold 200 million fewer domestic tickets in 2019 than its early highs. While movie theaters have been raising prices for years to offset declining ticket sales, there’s no guarantee moviegoers will return, especially as the pandemic appears to be continuing into its third year. In fact, when CivicScience recently polled 60,000 Americans, 71% said they’d rather watch something at home than go to the movies.
Yet as streaming grows in popularity, studios covet box office sales. This year, HBO Max ended same-day releases of its Warner Bros. theatrical releases, creating a 45-day theatrical exclusivity window. Perhaps no example is more telling than Paramount delaying the release of Top Gun: Maverick five times – while apparently refusing to sell the film to AppleTV+ and Netflix – to see that its tentpole franchise has the potential for a strong box office.
If movie theaters are able to replicate the success of Spider Man: No Coming Home in the first half of 2022 with blockbuster releases planned as the Batman and Top Gun: Maverickdon’t be surprised if studios like Disney or the future Discovery of Warner Bros. can’t resist a bigger slice of the pie from their billion-dollar franchises. 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 for the most likely target, Cinemark seems to be the most attractive. Although Cinemark doesn’t offer AMC’s market penetration, its presence in Latin America could be attractive as Latin influences on Hollywood grow. And each Cinemark theater represents $9.7 million of the company’s enterprise value – the best and lowest value per theater among its competitors.
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