Deals

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

Carmike shareholders' quibbling over AMC Entertainment's takeover offer could yet pay off -- if they don't push their luck. 

AMC, the U.S. movie theater chain controlled by Wang Jianlin's Dalian Wanda Group, had postponed the vote for the at-risk Carmike transaction to July 15 from June 30 after some top investors dug in their heels over the price (rightly so -- see why here). Two proxy advisory firms also recommended voting against the sale. But while that was simmering, AMC was working out a separate acquisition of Odeon & UCI, a U.K.-based cinema chain, seizing on the sudden valuation opportunity that was presented by the Brexit vote to close a deal it had coveted for a while. 

Brexit's Deal Beginnings
The drop in the pound allowed AMC Entertainment to pounce on a deal for the U.K.'s Odeon & UCI cinema chain. AMC said more U.S. companies will probably use the exchange rate to their advantage for M&A.
Source: Bloomberg

AMC CEO Adam Aron called the $1.2 billion cash-and-stock acquisition of Odeon & UCI "a pretty amazing plan B" during a conference call that seemed to toy with Carmike shareholders. At times during the call, AMC hinted at a readiness to walk away from the $1.1 billion Carmike deal, while also stating a continued commitment to it.

So which is it? Likely the latter, but both sides need to bend a little. Needless to say, it will be "high drama over the next several days," as Aron put it. 

Playing Hard to Get
Somewhere between the $40 or more that Carmike's top investors want and the $30 that AMC bid is a price that could bring both sides together. New deal terms with a stock component may be in the offing.
Source: Bloomberg

At first, he and his crew talked up the Odeon & UCI purchase, which does look to be a smart move. It renders Carmike less of a necessity for AMC than a nice addition if it can get it. With Odeon & UCI, the Leawood, Kansas-based company gets to expand throughout Europe, and at a relatively cheap price given the drop in the pound. There, it can employ a growth strategy that's working in the U.S.: upgrading aging movie theaters with reclining seats, better food and beverage options (even alcohol at some) and IMAX and Dolby systems. Aron says the timing is also right because theater-going in Europe is now growing faster than in the U.S.

It's clear that AMC still wants Carmike, though. Aron slipped in a key word: the probable need to issue equity to keep AMC's leverage in its target range should the company be able to complete both transactions. AMC is paying for the Odeon deal partly with stock, which is something that some Carmike shareholders had hoped for. The deal they're scheduled to vote for is currently all-cash.

Pressed as to whether he was suggesting AMC is open to negotiating new terms for Carmike that involve a mix of cash and stock, Aron pretty much said, in so many words, yes. But it definitely won't be the $40-a-share or higher that some investors were demanding. He called that level "unacceptable," adding that the "economics get marginal very fast for us above $30." However, he said, "we do intend to work with Carmike this week to see if we can save the transaction." 

Meet The Dissidents
The deal vote had to be pushed back because AMC's offer wasn't well-received by some Carmike shareholders, including the two largest. Also, about a third of Carmike's investor base is now hedge funds.
Source: Bloomberg, filings

The only way to save it is to adjust the offer and hope that shareholders will meet it somewhere in the middle.

The question is, will the potential new terms be enough to satisfy Carmike's biggest investors? They were right to push AMC for a more attractive offer. But by Brexit opening the door to the Odeon deal, AMC also gained more bargaining power in the Carmike situation. It's also important to remember that there haven't been any counterbidders (at least not publicly), it will be expensive for Carmike to make the renovations on its own that AMC was planning to do, and Carmike's stock is being supported by the potential deal.

If AMC does adjust the offer to include stock and it still contains a nice takeover premium, Carmike shareholders might as well take it -- because what the Odeon deal proved Tuesday is that AMC certainly isn't desperate to own Carmike now.

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