Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The No. 1 priority for a public company is to act in the best interest of its owners. But what happens when the board and shareholders disagree on what that means? 

This is the pickle Carmike Cinemas is in. The movie theater chain, located in mostly small cities and towns, thinks it's found itself a great deal: AMC Entertainment, a larger, deeper-pocketed rival with the backing of a Chinese billionaire, has agreed to acquire Carmike for $30 a share in cash, a total value of about $1.1 billion. But some investors -- including Carmike's largest -- think their company is being sold too cheaply. And even if these investors are right, their options are limited. 

There are many variables to consider when evaluating the takeover offer, and when taken separately, each can have a different implication.

Carmike's stock chart shows that it traded at a higher price not that long ago, revealing an opportunistic play on AMC's part. After all, Carmike has been the industry's most likely acquisition candidate for years, given that it's smaller than AMC, Regal Entertainment and Cinemark. AMC Chief Executive Adam Aron said last week that AMC and Carmike twice tried to reach an agreement in the past four years and weren't able to. Then Carmike shares pulled back, and bam, they had a deal.  

Market Timing
AMC's offer is 42 percent higher than Carmike's average price over the 20 days before the deal. However, the premium doesn't look so large compared to where Carmike had been trading a year ago.
Soure: Bloomberg

But being the smallest in terms of revenue and profit (Carmike lost money the past two years on a GAAP basis) argues for joining forces with a stronger competitor, such as AMC. In a time when people can stream new movies on fancy televisions from their own comfortable couches, the theater companies are having to make upgrades to lure the audience. Some have added reclining seats, alcoholic beverages and more IMAX screens -- and all these changes are quite costly, especially for Carmike. 

Smallest Player
The Carmike deal wasn't a surprise because its size relative to its peers made it a perennial target. Some shareholders think it should have pressed AMC for more money, though.
Source: Bloomberg
Consensus estimates for 2016

Carmike's valuation has also tended to be at a discount to the other players, so the deal does help close that gap. Still, while the offer looks like a large premium, remember, it's a premium over a stock that had fallen during the past year.

For Carmike's long-time shareholders such as Mittleman Brothers, the question is, why sell now at this level? "I'm baffled and frustrated," says Chris Mittleman, whose firm is Carmike's largest shareholder (it's owned the stock since 2007) and objects to AMC's offer. According to Mittleman, Carmike should receive a minimum of $40 a share in cash, or $35 a share in AMC stock. He's hoping other investors will join in voting against the transaction as it currently stands. 

The problem for shareholders in this type of situation is that an all-cash deal tends to quickly draw merger-arbitrage traders, who are short-term oriented and pretty much want their payout without fuss. That makes it even more challenging for other investors to block a deal they don't like.

While there was speculation initially that Regal or Cinemark might top AMC's offer, Carmike has said it didn't receive "any offers that provided greater value." The language Carmike used does have people curious to read the details of the auction process when the merger proxy statement comes out. Even so, Carmike shares are trading below the $30 offer, signaling that traders are generally betting the deal with AMC gets done. And Cinemark's CEO, Mark Zoradi, called the combination "a good marriage," implying he doesn't intend to break it up. Regal hasn't commented publicly. 

And so, in the end, the merger is likely to go through as is. A filing from Carmike Thursday explains why it believes the offer is in the best interest of its shareholders, using various valuation comparisons. On the other hand, analysts were projecting Carmike shares would climb to $30 apiece on their own this year, so the company probably could have pushed AMC for a couple more bucks. Each $1-a-share increase would cost AMC only about $25 million. An offer for $35 or even $40 a share would still be accretive to earnings next year, according to data compiled by Bloomberg.

AMC also could have added equity to appease Carmike shareholders, who would then at least get to benefit from any upside. There's already been some: AMC estimates the merger will provide $35 million of annual synergies, and its own shares have climbed 12 percent since the transaction was announced. If you want to see which side a deal favors, the acquirer's stock price is often a good place to start.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net