AMC Entertainment IPO: Wall Street Embraces Exhibition Stocks

Analysts: interest in theater sector grows with promise of further consolidation

AMC Entertainment struck out with two recent attempts to mount an IPO, but the timing may finally be right as Wall Street anticipates a new round of consolidation among the nation’s top exhibs.

The stock prices of the nation’s three other largest theater chains – Regal Entertainment, Cinemark and Carmike – are trading better than they have in years. And AMC’s joint venture with Regal Cinemas to launch Open Road Films in 2011 could prove attractive to investors.

“Being able to control a small portion of the content itself through Open Road, I think, is a very interesting change in the traditional business model,” said Ascendiant Capital Markets analyst Marla Backer. “Ultimately it’s such a small portion of AMC today that it’s not enough to movie the needle, but I think it enhances the overall story.”

A spokesperson for AMC declined to comment.

AMC, the country’s second-largest theater chain behind Regal, filed documents for an initial public offering on Friday. The move marks AMC’s third try at an IPO after aborted efforts in 2007 and 2010. The company, which operates 343 theaters and 4,937 screens, mostly in North America, didn’t specify how many shares it would offer or at what price.

Carmike and Regal stocks are trading at their highest levels since before the 2008 financial crisis, with Carmike hitting all-time highs. Some analysts credit the uptick to increased M&A activity in the exhibition space and the promise of broader consolidation in the industry.

“I think now is a very good time for exhibition,” Backer said. Backer pointed toward theater chains adopting more 3D screens and high-end to offer consumers a diverse range of experiences, including more 3D screens. “The movie-going experience is just getting better and better, which I think creates opportunities for exhibitors.”

On top of that, the industry has seen consolidation among its smaller exhibitors. In November, Cinemark completed its $240 million acquisition of Dallas-based Rave Cinemas, a move which gave Cinemark more than 480 screens.

Some observers say that an IPO could be a way for AMC’s owner, Chinese conglomerate Wanda, to fuel acquisitions.

“There are probably 20,000 screens that are owned by independents, and probably 5,000 of those will be sold to the Big Four (exhibs) in the next five years,” said Michael Pachter, an analyst with Wedbush Securities.

The average theater screen generates about $250,000 a year, according to Pachter, who bases his number on an average annual box office of about $10 billion and the nation’s some-40,000 screens.

“You’ve gotta hire people, you’ve gottta clean the place and you’ve gotta pay rent,” Pachter says. If an independent theater owner, particular one who might be interested in retiring, could sell at an attractive multiple, “you’ll take it.”