Fitch: Regal Ratings Unaffected By Hollywood Theaters Acquisition
NEW YORK -- February 19, 2013
The ratings of Regal Entertainment Group (Regal) and Regal Cinemas Corporation
(Regal Cinemas) are unaffected following Regal's announced acquisition of
Hollywood Theaters, according to Fitch Ratings. The acquisition would add 43
theaters and 513 screens to Regal's portfolio. The transaction is expected to
close in the second quarter. Please see a full list of ratings at the end of
According to Regal's announcement, the acquisition price will consist of $191
million in cash, which a portion will be used to repay approximately $157
million of the seller's debt. Regal will also assume approximately $47 million
in lease obligations.
Fitch expects the acquisition to be funded with the $250 million HoldCo Note
offering from Jan. 14, 2013 ('Fitch Rates Regal's Note Offering 'B-'/'RR6').
Including roughly $250 million of proceeds from the January issuance, Fitch
estimates liquidity of roughly $360 million in cash (cash balance at Dec. 27,
2012 was $110 million) and $82 million of availability (as of Sept. 27, 2012)
under Regal Cinemas' $85 million revolving credit facility due May 2015.
The acquisition is consistent with Fitch's expectation that there will be
further consolidation in the industry and is factored into current ratings for
Regal and its peers. Heightened consolidation is primarily being driven by
ease of capital market access and the expected obsolescence of traditional
celluloid film. Material debt-funded acquisitions that drove leverage beyond
Fitch's long-term threshold of 4.5x for Regal could have a negative impact on
As of Dec. 27, 2012 (pro forma for the January issuance and Hollywood capital
and financing lease obligations), Fitch calculates unadjusted gross leverage
at 4.2x. Regal disclosed a pre-synergy transaction multiple of 5.9x cash flow
as part of its acquisition announcement (implies roughly $40 million of annual
cash flow). Inclusive of the incremental debt and $40 million of annual cash
flow (assuming cash flow is equal to EBITDA) from Hollywood, Fitch estimates
pro forma gross unadjusted leverage at 3.9x.
The current ratings and Stable Outlook reflect the following considerations:
--Fitch believes movie exhibition will continue to be a key promotion window
for the movie studios' biggest/most profitable releases.
--Fitch recognizes that theater attendance is inherently volatile due to the
quality of the film slate in any given year. The 2013 slate is promising with
many sequels including, The Hunger Games: Catching Fire, Iron Man 3, Star Trek
Into Darkness, The Hobbit: The Desolation of Smaug, and Thor: The Dark World.
However, due to the strong 2012 performance (+6.5% according to Box Office
Mojo), which will be a challenge to match, Fitch's current base case for 2013
is for attendance to decline in the low single digits.
--For the long term, Fitch continues to expect that the movie exhibitor
industry will be challenged in growing attendance and any potential attendance
declines will offset some of the growth in average ticket prices. The ratings
factor in the intermediate/long-term risks associated with increased
competition from at-home entertainment media, limited control over revenue
trends, the pressure on film distribution windows, and increasing indirect
competition from other distribution channels (such as VOD and other OTT
services). Regal and its peers rely on the quality, quantity, and timing of
movie product, all factors out of management's control.
--Fitch does not anticipate a significant decline in concession revenue per
patron, but remains cautious that high-margin concessions (which represent 26%
of Regal's total revenues and carry 87% gross margins), may be vulnerable to
reduced per-guest concession spending due to economic cyclical factors or a
re-acceleration of commodity prices. A slight deterioration in concession
margin is factored into the current rating. While Fitch expects increased
concession spending per guest, margins are expected to contract due to the
lower margin premium menu offerings introduced by Regal and other theater
--Fitch believes that Regal will continue to focus free cash flow (FCF)
deployment toward build-out/expansion of theaters, acquisition of theater
assets, and/or for shareholder-friendly activities.
--Fitch heavily weighs the prospective challenges facing Regal and its
industry peers in arriving at the long-term credit ratings. Significant
improvements in the operating environment (e.g. sustainable increases in
attendance) and sustained deleveraging could have a positive effect on the
rating, though Fitch views this as unlikely.
--Fitch anticipates that Regal, and other movie exhibitors, will continue to
consolidate. While not anticipated, a material debt-funded acquisition or
return of capital to shareholders that would raise the unadjusted gross
leverage beyond 4.5x could have a negative impact on the rating.
--In addition, meaningful, sustained declines in attendance and/or per-guest
concession spending which drove leverage beyond 4.5x could pressure the rating
Free Cash Flow
Fitch estimates FCF (less dividends) for latest 12 months ended Dec. 27, 2012
was roughly negative $30 million. Fitch's FCF calculation deducts both the
$155 million special dividend and Regal's regular dividend. In 2013, including
its regular dividend payment, Fitch expects FCF to be roughly $50 million to
$75 million. The company does not have any pension obligations.
There are no significant maturities until 2017 when the term loan facility
As of Dec. 27, 2012, pro forma for the $250 million Regal issuance in January,
gross debt totaled $2.2 billion and was made up of:
--Regal Cinemas' $990 million secured term loans (due 2017);
--Regal Cinemas' $400 million unsecured notes (due 2019);
--Regal's $525 million unsecured notes (due 2018); and
--Regal's $250 million unsecured notes (due 2025).
Regal's Recovery Ratings reflect Fitch's expectation that the enterprise value
of the company and, thus, recovery rates for its creditors, will be maximized
in a restructuring scenario (as a going concern) rather than a liquidation.
Fitch estimates a distressed enterprise valuation of $1.7 billion, using a 5x
multiple and including an estimate for Regal's roughly 20% stake in National
CineMedia, LLC of approximately $190 million. Based on this enterprise
valuation, which is before any administrative claims, overall recovery
relative to total current debt outstanding is approximately 75%.
The 'RR1' Recovery Rating for the company's credit facilities reflects Fitch's
belief that 91%-100% expected recovery is reasonable. While Fitch does not
assign Recovery Ratings for the company's operating lease obligations, it is
assumed the company rejects only 30% of its remaining $3.2 billion in
operating lease commitments due to their significance to the operations in a
going-concern scenario and is liable for 15% of those rejected values (at a
net present value). Fitch's recovery analysis shows 84% recovery for Regal
Cinemas' senior unsecured notes (equal in ranking to the rejected operating
leases), which maps to an 'RR2' Recovery Rating. The 'RR6' assigned to Regal's
senior unsecured notes reflects the structural subordination of the notes and
Fitch's expectation for zero recovery.
Fitch currently rates Regal and Regal Cinemas as follows:
--Issuer Default Rating (IDR) 'B+';
--Senior unsecured notes 'B-/RR6'.
--Senior secured credit facility 'BB+/RR1';
--Senior unsecured notes 'BB/RR2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 08, 2012);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers'
(Nov. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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Shawn Gannon, +1-212-908-0223
Fitch Ratings, Inc.
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Rolando Larrondo, +1-212-908-9189
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