Market Insight

Cineworld shareholders approve acquisition and notion to become second largest global exhibitor

February 05, 2018

Charlotte Jones Charlotte Jones Associate Director – Research and Analysis, Cinema, IHS Markit
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Shareholders of UK cinema group Cineworld have approved its $3.6bn deal to acquire exhibition giant Regal Entertainment group, currently the second largest exhibition group by screen count in the US and globally.

Over 87% of the shareholder votes cast at the Annual General Meeting on 2nd February approved the deal, which is expected to close on March 2 or before. Further, The Anshutz Corporation, majority shareholder of Regal, also gave its written consent following the passing of the above resolution. Regal had just completed a ‘go shop’ period uneventfully and without further offers. The deal values Regal at $23 per share.

The combined entity would propel Cineworld to second largest global exhibitor with a combined total of 9,532 screens across 10 international territories. The larger assets of Regal would make up 77% of this total footprint.

With 7,321 screens in 560 cinemas, Regal had previously been the largest operator in North America but was usurped in late 2016 following Wanda-owned AMC’s acquisition of Carmike Theatres for $1.1 billion. Regal operates a number of megaplex theatres and its average number of screens per theatre (13) is a third larger than the Cineworld average.

As the second largest European exhibitor, Cineworld (2,217 screens) is present in nine territories (including Israel). Following its 2014 acquisition of Cinema City, it has continued to invest in new sites as well as growing through further strategic acquisitions.

Our analysis

The agreement (while contingent on a planned successful rights issue to raise $1.7 billion plus the necessary regulatory approvals) pushes the mega acquisition, as the single largest transaction screen-wise, into the closing stages.   

While there are the inevitable efficiencies in streamlining operations of the two groups, the full extent of which is yet to be seen, the major coup for Cineworld is assuming the role of second largest global exhibition player, simply by acquiring Regals’ screen assets in one fell swoop.  

The other major win is a dominant foothold in the prime US market, which is increasingly seen as the vital competitive edge among the new global exhibition powerhouses, a trend that was first set in motion with Wanda’s $2.6bn acquisition of AMC’s US assets in 2012. For example, the top six global circuits all have a presence in the US exhibition market including Mexico’s Cinemex, as the sixth largest international player, which recently opened its first theatre as a luxury dine-in concept in Miami in April 2017.

Cineworld would also become only the second European operator to expand in North America, following completion, in December 2017, of the Kinepolis acquisition of Landmark Cinemas of Canada’s 330 screens, and the first in the US market itself. This scenario will also see two (the largest two) of the top three circuits in the US under international ownership.

Consolidation is a hot topic with key international circuits seeing opportunities to strengthen their competitive advantage amid high levels of fragmentation in certain territories. There has also been a surge of interest in international or multi-regional assets (such as Cinepolis’s acquisition of Yelmo in 2015 and CJ CGV ‘s buy out of Cinemaximumm in Turkey in 2016 and latterly investment in a Russian joint venture in 2017) rather than being purely regionally focused, which had been the traditional pattern of exhibitor M&A activity for some time. The change in strategy enables exhibitors to dramatically increase overall size and bolster their competitive position.  

To that end, the combined Cineworld/Regal entity would be a competitive force globally to rival that of Wanda/AMC (with 14,439 screens across 17 territories), as the largest global exhibitor and only group to hit the 10,000 screen milestone. Its other main competitors are Cinemark (5,810 screens as at May 2017 according to IHS Markit) with a strong existing presence in US and Latin America and Cinepolis (4,953 screens) with a smaller but growing trajectory of luxury theatres in the US. CJ CGV (2,906 screens) is also worth a mention as it continues to embark on an aggressive expansion strategy and has publically stated its goal is to hit the 10,000 screen threshold.

In Europe, Cineworld competes with the Wanda/AMC--backed assets of Odeon, UCI, Nordic Cinema Group--and Vue Entertainment, which controls nearly 1,900 screens across 10 European territories.

Cineworld claims that it already has similar experience to see the deal through namely the significant merger of Cinema City in 2014. It also intends to bring further potential through increasing investment in premium cinema initiatives such as 4DX and Imax as well as introducing next generation cinemas.

Strategically, Regal has already made significant progress in upgrading 27% of sites with recliners for a planned target of 45% by 2019. It also already has more own brand premium large format (PLF) screens than Cineworld both in number and proportion with RPX screens at 109 (or 1.4% of total screens) versus 11 Superscreens (0.49% in total or 1.12% in UK) for Cineworld. But Cineworld clearly sees value in investing in furthering this potential. And indeed the two companies already have complementary strategies in premiumising screen assets especially in regards to both the UK and US market, where it will be in direct competition with Wanda-owned and AMC-backed Odeon screens. Cineworld has one of the larger exhibitor footprints of 38 4DX screens, and while Regal is also adding 4DX screens, it could be one of the key areas more heavily invested in. For other innovative companies such as CJ CGV, expansion has also been an opportunity to expand their own technology assets such as 4DX, Sphere X and the panoramic Screen X, although the company remains unique in this regard to date.

The benefits of consolidation include a stronger negotiation platform with regard to existing as well as newer and more disruptive stakeholders in the film and cinema value chain. The traditional players of exhibition and distribution are being increasingly challenged as digital markets continue to present new and challenging scenarios in the exhibition landscape. Traditional ones being the Studios and film rental deals for big blockbuster titles.

The integration of third party players such as Moviepass into traditional business models, as well as now long running negotiations into premium VOD or day and date releasing have shown how larger exhibitors have more weight in voicing their objections or indeed negotiating a potential revenue share of new world scenarios. Although the Regal acquisition remains one of the single largest transactions screen wise in the exhibition sector, the market is primed for further consolidation in 2018 as the key exhibitors look to maintain and grow their competitive position not just regionally but on a global scale.

 

 

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