UK-based cinema exhibitor Cineworld (LSE: CINE) is in talks to acquire Regal Entertainment Group (NYSE: RGC) in an all-cash acquisition at $23 per share, valuing the latter at $3.6bn.
Cineworld is the second largest exhibitor in Europe and the 11th worldwide by number of screens with 2,217 in 232 cinemas, and it is present in 8 European countries and Israel after the acquisition of Cinema City in 2014. Cineworld has continued its expansion in the last year with the acquisition of 64 screens from Empire Cinemas in the UK and the opening of 8 new sites across various territories adding 78 screens to its portfolio. Strategically, Cineworld is focused on the renovation of its UK sites and on the installation of more technology features (Dolby Atmos, 4D, PLF) across its cinemas.
Regal counts 7,315 screens in 561 cinemas, almost three times as many screens as Cineworld, and was the largest cinema exhibitor in the US and worldwide until Wanda-owned AMC acquired Carmike at the end of 2016. After this, Regal became the second largest cinema chain in the US with an 18% market share in 2016 according to IHS Markit data. Regal is driving a similar strategy in its US sites than that of AMC by focusing on recliner seats, food and beverage innovation and audience engagement programmes.
Both companies have confirmed the advanced state of the talks but have insisted that no deal has been reached yet and so the acquisition could still fall through.
This news comes at a time of executed and proposed M&A activity in the cinema exhibition sector that draws different scenarios of consolidation and competition.
Following AMC’s acquisitions of Cinemark, Odeon & UCI and Nordic Cinema Group in the last 18 months, AMC has just announced that it will seek an IPO of 25-30% of its European subsidiary in the next two years. This would allow it to capitalise some of its investment in the acquisition, hopefully with a gain, whilst still retaining control of the operations and strategy.
Some sources have however pointed to a potential sale of the full Odeon & UCI group as a solution to counter the performance of AMC’s stock price (which has dropped by 60% from a peak in January) and to reduce its liabilities (which have doubled to almost $8bn since the end of 2015 due to the acquisitions spree). Among the potential buyers is
Vue International, the third largest pan-European exhibitor in number of screens with 1,902 and the third exhibitor in the UK, which would become the largest pan-European exhibitor and present a real threat to Cineworld in the continent and particularly in the UK with close to a 40% market share – although it is unlikely the resulting group could keep all its screens. Cineworld generates almost 60% of its revenue in the UK and Ireland.
Alternatively, Vue has been reported to be seeking an IPO itself whilst South Korean group CJ CGV has also showed interest in the group. Either of these scenarios would provide Vue with more capital to continue its expansion and renovation of cinemas and the ability to respond to Cineworld’s expansion too in the markets where they are both present – UK, Ireland and Poland – and any new ones.
Finally, the fourth largest pan-European group, Kinepolis, has recently acquired Canadian chain Landmark Cinemas subject to clearing any regulations obstacles.
A reason and a consequence of this activity is the pressure that it puts in the main groups to keep their competitive advantage: Wanda-AMC, Regal, Cinemark, Cinepolis, CJ CGV, Cinemex, Cineworld, Vue and Kinepolis, as well as Dadi Cinemas in China are set to become subjects or objects of M&A activity. And in fact, most of them have been acknowledging to their investors that they consider any of such deals that comes through their door when seeking to increase shareholder value.
The only reason for the acquisition quoted by Cineworld so far is to gain a foothold in the US market - a strong one given the number of Regal’s screens though. But it would also achieve two more milestones. Firstly, to be become the second largest group in the world in number of screens with a 5.5% market share according to IHS Markit data, just behind Wanda-AMC. And secondly, to be the first European group to have presence in the US, the opposite of AMC, under which sit all the European subsidiaries that are adopting AMC’s strategy. This would also give it a strong advantage over all the other pan-European groups.
Although it would be subject to the restructuring of management and strategy, Cineworld’s acquisition would also counter balance the control of screens that North American and Asian companies have so far by giving a more pan-continental presence to a European group. Kinepolis’ acquisition of Landmark would go in the same direction.
In the UK and Ireland, main markets for Cineworld, it had 22.2% of the screens and collected 24.7% of the box office and sold 28% of UK admissions in 2016, making for a successful operation on the film side; additionally, it achieved a £1.90 ($2.58) spend per person on the concessions side. On the other hand, Regal gathered 17.3% of admissions and 19.6% of the US box office with 18.2% of the screens, leaving room for improvement on the film side; from a revenue stand point it compensated with higher concessions per patron of $4.42, as is usually the case with US audiences. It is likely that the new formed company would seek to improve results on both metrics by using the best the two legacy companies’ strategies.
In particular in the UK market, where Cineworld was leader in 2016 with 977 screens, it is likely that the new group will focus its efforts to keep up with the changes that AMC will introduce in its Odeon sites (if it retains control), particularly with the deployment of recliner seats. This feature is still in its infancy in Europe in penetration terms, but it is becoming common in many US theatres – Regal aims to refit 45% of its auditoriums with them by 2019 and Cineworld may will likely pick up this expertise.The deal is subject to approval from the companies’ shareholders and it is not ruled out that other companies may also bid for Regal.