Mittleman Brothers LLC: Valuation insights about movie theater business
Excerpts from the letters
U.S. movie theater industry
The U.S. movie theater industry has long been known to be a slow growing cash machine, generating consistent free cash flow that has proven to be recession-proof (even during the Great Recession of 2007-2009, the movie theater industry barely flinched). That is why movie theaters have attracted smart money owners and private equity firms for decades. Movie theaters generate utility-like, recurring free cash flows, but trade at lower multiples due to the persistent fear (since the advent of television) of their impending demise due to new alternatives for viewing movies (TV, VCR, DVD, Netflix, etc.).
Carmike’s theaters are concentrated in the Southeastern and Southwestern parts of the U.S., demographically favorable regions with above average population growth. And while most of the money made in the movie theater business is made by the concessions sales (what AMC calls F&B, food and beverage), Carmike has the highest gross margin on their concession sales in the industry (89%) and the highest per capita concession sales at $5.33 per patron per visit in Q4 2015. AMC, a much larger company serving generally wealthier metro-area populations, had an 86% gross margin in concessions and a $4.75 per patron spend in Q4 2015.
Carmike’s scarcity value as the fourth largest theater company, and one of the best performing chains in the U.S., is thus squandered, while AMC goes from the second largest in the U.S. to the largest in the world, with all the economic benefits that such scale produces, in an immediately and massively accretive deal costing them only 5x EBITDA.
From year-end 2008 to year-end 2015, a seven year period in which industry-wide box office receipts in North America rose from $9.63B to $11.12B (2.1% CAGR), Carmike’s sales increased from $473M to $804M (7.9% CAGR), EBITDA rose from $73M to $135M (9.2% CAGR), and the stock price went from $3.65 to $22.94 (30% CAGR). In contrast, Regal Entertainment Group (“RGC”), the largest theater chain in the U.S., grew sales from $2.77B to $3.13B (1.8% CAGR), EBITDA from $450M to $608M (4.4% CAGR), and stock price from $8.28 to $18.87 (18.8% CAGR including dividends).
Comparable takeover valuation
The most recent major buyout of a movie theater business was announced in June 2015 when Dalian Wanda (AMC’s Chinese parent company) bought Australia’s 2nd largest movie theater company, Hoyts, for $777M, which was 10.9x its $71.4M in EBITDA. Carmike at that multiple would be $47.60, including $2.00 per share in estimated Screenvision value.
A $1B+ enterprise value movie theater company was the London-based Vue Entertainment Ltd., bought out on 9/30/13 for $1.46B, or 8.5x $171M in EBITDA, by two Canadian private equity firms, OMERS Private Equity and Alberta Investment Management Corp. What’s impressive there is the 8.5x multiple was paid by a private equity group, not a strategic buyer with synergies to lower the ultimate cost.
The only other $1B+ deal in the past five years was the Chinese company Dalian Wanda’s $2.75B buyout of AMC announced in May 2012, which was a 9.1x EBITDA multiple on $303M adj. EBITDA in 2011.
In October 2006, Cinemark Holdings (“CNK”) acquired Century Theatres (“Century”) for $1.04B, which was 8.6x its $121M in EBITDA. Carmike at that multiple would be $35, again, including our $2.00 per share in estimated Screenvision value.
A simple average of the four comparable transactions listed above, based on what the sellers received (Hoyts 10.9x, Vue 8.5x, AMC 7.5x, and Century 8.6x) equals 8.88x.
Yet despite Carmike’s vast outperformance of industry giant Regal Entertainment Group (“RGC”) over these past seven years, the valuation at which Carmike has agreed to sell itself to AMC is vastly inferior to RGC’s current market trading valuation. RGC at last trade on March 4, 2016 of $20.38 had an enterprise value (“EV”) of $5.55B, which is 9.1x the $608M in EBITDA that RGC produced in 2015, without any control premium, which controlling shareholder Philip Anschutz would presumably require if he were to sell RGC. At the $30 take-over price from AMC, Carmike’s EV is $1.04B (adjusted for their 18% stake in Screenvision which I value at $50M), which is only 7.7x the $135M in EBITDA produced by Carmike in 2015. At the 9.1x EBITDA multiple where RGC is already trading in the open market today, Carmike would be $38 per share. There is no way that in a change-of-control, cash-out takeover, the stock should be surrendered for any less than that. Carmike’s stock was $35 in March of 2015, and $36 in June of 2014. But given Carmike’s superior performance, I believe $40 (9.5x EBITDA) is fair value for a complete cash-out change-of-control sale.
If AMC paid $40 per share to Carmike, ignoring the $50M in value I previously ascribed to Carmike’s Screenvision stake, the EV/EBITDA multiple Carmike would receive would be 9.9x. But adjusted for the $35M in annual synergies AMC would extract, the cost to them falls to 7.8x EBITDA, less than the cost to buy back their own stock in the open market today at $27. Then subtract the $258M in additional NCMI share value that AMC would receive, and the cost drops to only 6.3x. That’s all it would cost AMC to buy Carmike at $40 and become the largest movie theater company in the world. Giving it to them at $30, or 5x EBITDA , is an unwarranted gift.
To us that is a minimum of $35 per share (8.6x EBITDA of $135M or 14.4x FCF of $60M) to $40 per share (9.5x EBITDA or 16.4x FCF), and all before the huge synergies of a merger with AMC.