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Momentum for exhibitor mergers

Cost of digital conversion, overseas interest will help generate more exhib M&A.

A surge of movie theater M&A launched by Wanda’s dramatic buy of AMC and followed by deals at Carmike, Cinemark and Regal should continue, Wall Streeters and insiders predict, with digital costs spurring more hookups among the top 30 circuits and interest from overseas.

Deals totaling well over $3 billion this year, inflated by Wanda’s $2.6 billion purchase of AMC in May, wound down last week with Regal’s $91 million acquisition of Great Escapes. That agreement closed fast as private owner the Ragain family wanted it done by year-end — one of many deals across industries spurred by uncertainty on tax policy as of Jan. 1.

The cost of digital conversion will spur more deals as smaller chains look to cash out if they can. The National Assn. of Theater Owners has estimated that 10%-20% of U.S. theaters won’t be able to convert and may close. In other cases, private equity firms are at the end of a typical three-to-five year investment cycle.

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Rave Cinemas, which sold out to Cinemark and Carmike and unloaded four theaters to AMC, was owned by Towerbrook Capital and Boston Ventures. AMC was owned by a consortium including Apollo Management, Bain Capital and Carlyle Group.

“The whole transition to digital seems to be creating movement in M&A, and there’s also been a nice box office tailwind that tends to bring sellers off the bench,” said Regal CFO David Ownby. “We think the momentum will continue.”

He sees most deals occurring between the bigger players. “Beyond the top five circuits, the real opportunity is in the top 30-35 (chains) with the big guys buying them. Once you get down below that, it’s just a couple of theaters,” he said.

Private equity’s at the end of its investing life cycle, he said. Private families tend to sell when there’s generational change. The bigger the chain, the more leverage and economy of scale for studios’ rental fees and concessions.

Cinemark spent $240 million on 32 Rave theaters, strengthening its New England presence. Carmike’s deal for 16 theaters was worth $120 million. AMC bought a few Rave locations in the South and Southeast for an undisclosed amount.

“I feel left out,” joked Ownby.

The Rave carve-out shows one challenge for the biggest chains, which are pretty ubiquitous. Regal already operates in 43 of the top 50 U.S. markets. Execs say the other barrier is finding theaters they like. Rave locations have many all-digital screens with significant 3D capacity but not all chains do.

They may face competition from international buyers, who are eyeing also the space. In June, AMC sold four theaters in Quebec and Ontario to Canada’s Cineplex Odeon.

“We see additional acquisitions by foreign media companies in the U.S. We’ve talked to a number of them,” said Evan Klein, managing director of boutique investment bank Berkery Noyes, who repped Great Escapes in the Regal deal, describing interest by “leading exhibitors in leading countries” in Europe, South America and Asia.

Wanda chairman Wang Jianlin has already said he wants to add to his U.S. portfolio.

Klein cited synergies, in Canada and the U.S., and said overseas groups see “a great amount of knowledge” Stateside and assets at attractive prices. The reverse is also true. “Everything in Europe is for sale,” said one industry CEO. Busy circuits
Top 10 exhibition chains in the U.S.

1.Regal6,7772.AMC5,3363.Cinemark USA3,8254.Carmike Cinemas2,2685.Cineplex1,3476.Rave Motion Pictures9367.Marcus Theaters6688.Hollywood Theaters5469.National Amusements45010.Harkins Theaters429
– Source: NATO, Boxoffice.com

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