Carmike Cheap After 115% Rally Spurs Deal Talk: Real M&A

Carmike Cinemas Inc. David Passman
Carmike shares have surged 115 percent as Chief Executive Officer David Passman leads a turnaround that analysts project will return the Columbus, Georgia-based company to profit this year after six straight annual losses. Photographer: Peter Foley/Bloomberg

Carmike Cinemas Inc., after more than doubling in price this year, is still the cheapest theater chain in America for rivals looking to acquire more movie screens and boost earnings from popcorn and ticket sales.

Carmike shares have surged 115 percent as Chief Executive Officer David Passman leads a turnaround that analysts project will return the Columbus, Georgia-based company to profit this year after six straight annual losses. Even with the stock gain, Carmike is valued at 4.9 times earnings before interest, taxes, depreciation and amortization in the last 12 months, the lowest among U.S. cinema operators with a market capitalization greater than $100 million, according to data compiled by Bloomberg.

Regal Entertainment Group and Cinemark Holdings Inc. may be interested in the $262 million company to gain Carmike’s 2,264 movie screens and more negotiating power with Hollywood studios, B. Riley & Co. said. China’s Dalian Wanda Group Corp., which agreed in May to buy AMC Entertainment Holdings Inc., may also bid for Carmike, according to Maxim Group LLC. Carmike could fetch at least $20 a share, Macquarie Group Ltd. said, 35 percent more than yesterday’s close. At that price, a buyer would be paying the lowest Ebitda multiple in eight years among similar-sized deals for U.S. movie theaters, the data show.

“They’ve done an exceptional job on the attendance side and also on the concession side, which is why the stock has run up so quickly,” Chad Beynon, a New York-based analyst for Macquarie, said in a telephone interview. “They’ve really turned the corner. It’s a pretty asset right now. I do think it is a candidate” for a takeover.

Clean Theaters

“We do not comment on rumors of this nature,” Carmike’s Passman said, according to an e-mail from a spokesman for the company, after being asked whether the chain has been approached by potential suitors.

Carmike, founded in 1982, emerged from bankruptcy a decade ago and has since grown to become the nation’s fourth-largest motion picture exhibitor. It has 236 theaters in states from Georgia and North Carolina to Colorado and Pennsylvania.

Passman, who took the helm in 2009, has worked to improve Carmike by ensuring cleaner theaters and enticing patrons to spend more at the concession stands. His strategy is beginning to pay off, says John Tinker, an analyst at Maxim in New York.

Analysts are projecting the cinema chain will earn $17 million in net income this year, its first annual profit since 2005, according to estimates and data compiled by Bloomberg. Sales, which declined the last two years, are estimated to climb 11 percent to a record $536 million, the data show.

‘Safe Entity’

“This is a relatively safe entity you’re taking over, which has to be attractive to people,” Tinker said in a phone interview. “The current team sorted out what really hadn’t been well managed before.”

U.S. box-office sales have climbed 6.6 percent this year through July 15 to $6.05 billion and attendance rose 9.1 percent, according to Box-Office, with hits such as the superhero blockbuster “Marvel’s The Avengers” and the young-adult thriller “The Hunger Games.” “The Dark Knight Rises,” the third installment of the Warner Bros. trilogy starring Christian Bale as Batman, may generate as much as $198 million in this weekend’s opening to become the second-biggest U.S. debut of all time, said.

“It’s a good time for theater companies,” Eric Green, a Philadelphia-based fund manager at Penn Capital Management Co., which oversees $6.8 billion, said in a phone interview. “Batman’s coming this weekend. People are juiced up on the theaters at the moment.”

Low Multiple

While Carmike shares have more than doubled this year to $14.82 as of yesterday, Regal’s stock gained 17 percent and Cinemark rose 31 percent.

Carmike’s equity and net debt are now valued at 4.9 times its trailing 12-month Ebitda, a lower multiple than every other entertainment facilities and services company in the U.S. with a market value greater than $100 million, data compiled by Bloomberg show. The group, which includes Regal and Cinemark as well as amusement park operators Six Flags Entertainment Corp. and Cedar Fair LP, trades at a median of 8.2 times Ebitda.

Even using analysts’ estimates for Ebitda in fiscal 2013, Carmike has the cheapest valuation at 4.5 times, the data show.

“It could be an attractive acquisition candidate,” Green said. “It’s trading cheaper than the other cinemas.”

A takeover of Carmike would help Regal, the largest U.S. theater chain, and Cinemark, the third-biggest, gain more scale to better bargain with studios from which they purchase movies, said Eric Wold, a San Francisco-based analyst for B. Riley. It would also give them screens in smaller cities where there is less competition, he said.

New Markets

“It would be an attractive acquisition candidate because you could get into a new market, expand into areas you haven’t been at all before,” Wold said. Carmike is “usually the only theater in town.”

Buyers could reduce overhead expenses by cutting management positions, and Carmike wouldn’t have to shoulder the costs of being a public company, Maxim’s Tinker said.

Wanda agreed two months ago to buy AMC Entertainment, the second-biggest U.S. theater chain, for $2.6 billion including net debt, creating the world’s largest cinema owner. China’s biggest entertainment group could bid for Carmike next to increase its foothold in America, Tinker said.

Jeremy Jacobs, a spokesman for Dalian, China-based Wanda, declined to comment on whether the company is interested in acquiring Carmike. Ken Thewes, a spokesman for Knoxville, Tennessee-based Regal, didn’t immediately respond to a phone call and e-mail seeking comment. Cinemark executives weren’t available to comment, said Rob Rinderman, an external spokesman for the Plano, Texas-based firm.

Buying Instead

James Goss, a Chicago-based analyst for Barrington Research Associates Inc., said that while Carmike is improving, the company is more likely to acquire smaller cinemas now than sell itself. Carmike issued 4.6 million shares of common stock at $13 a share in April and plans to use some of the proceeds to make purchases, according to its May 7 earnings statement.

Carmike is “going from a fix-it to a grow-it strategy,” Goss said in a phone interview. Selling “could be an endgame. But since we’re just getting to a point where it’s really comfortable to show this growth profile, it’s also just as reasonable to think that they might be able to acquire other properties and build their own base.”

The company’s managers and stockholders may be willing to sell at the right price, said Macquarie’s Beynon, who estimates Carmike is worth at least $20 a share in a takeover. That would value the chain at $538 million, including net debt.

Cheap Deal

At that price, a buyer would be paying 5.9 times Carmike’s Ebitda in the last 12 months, the cheapest valuation among takeovers of U.S. theater chains greater than $100 million since 2004, data compiled by Bloomberg show. It also would be less than the 9.1 times Wanda paid for AMC, Beynon said.

B. Riley’s Wold said a buyer could pay a price in the “low $20s,” and the deal would still add to its earnings.

“Carmike should clearly be in the crosshairs of a lot of the larger exhibitors,” Wold said. “Given the discount they’re trading at versus Cinemark and Regal, you could pay a nice premium and still make it accretive.”

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