Deals

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

Adam Aron, CEO of AMC Entertainment, sure knows how to taunt Carmike Cinemas' shareholders. During his company's second-quarter earnings call on Monday, Aron described a gloomy future for Carmike should it snub AMC's revised takeover offer. As for AMC, according to him, it would skip merrily on its way to other perhaps less onerous transactions, with $1 billion figuratively in hand: 

I shudder to imagine what would happen to Carmike's stock performance in a stand-alone scenario if an AMC offer were not artificially buttressing and supporting where Carmike shares now trade.

As I've said before, it's obvious that a merger makes sense. And AMC's new cash-and-stock bid does look far better than the original terms the companies set in March. But if a majority of Carmike's investors reject the deal when the new meeting date is scheduled, AMC's M&A options are far more limited than it's posturing. 

Deal Odds
Even though AMC's new offer isn't as large as some shareholders had hoped, traders seem to be betting a deal will win enough support to get done. But if they're wrong, Carmike's stock may plunge.
Source: Bloomberg

The company's controlling shareholder, Chinese billionaire Wang Jianlin's Dalian Wanda Group, wants to be the next Walt Disney, and AMC is a vehicle for accomplishing that. Wang has set his sights on entertainment assets, from movie theaters like AMC and Carmike to Hollywood studios. Carmike is the fourth-biggest cinema company in the U.S. based on both revenue and market value, and its more rural locations would complement AMC's presence in larger markets. More important, though, Carmike is the only takeover candidate of size that AMC could realistically pursue without drawing the ire of competition regulators. 

The Big Picture
Carmike Cinemas is Chinese billionaire Wang Jianlin's best option for expanding AMC within the U.S. Regulators probably wouldn't allow AMC to buy its other large rivals:
Source: Company filings, National Association of Theater Owners data compiled by Bloomberg Intelligence

This shows why neither Regal nor Cinemark are feasible targets for Wang. Of course, AMC could scoop up smaller independent chains, but the financial and strategic benefits would produce merely a shrug from shareholders who want to see meaningful growth. Also, Wang and Aron would hate to see Regal or Cinemark grab Carmike on the rebound.

Aron is correct that AMC's bid is largely supporting Carmike's valuation. But even though every analyst tracked by Bloomberg has a bullish rating on AMC shares, the company's own investors don't seem fully convinced yet. As it is, AMC's revenue just missed estimates, with both admissions and food and beverage sales down year over year. (Aron said the business was at a disadvantage because more family movies were shown last quarter, which means cheaper children's tickets.)

Proving Itself
As AMC Entertainment pursues M&A and invests in cinema upgrades, shareholders need more convincing that it will all pay off
Source: Bloomberg

Separate from the Carmike deal, AMC announced a European expansion last month through the acquisition of Odeon & UCI Cinemas, a post-Brexit gamble that moviegoing in the region will continue to accelerate as it plows heaps of money into theater upgrades. But while AMC could theoretically buy more chains abroad should the Carmike transaction fail, Aron himself said last month that it was still Americans who are the most "fanatical about films." He and Wang know how important dominance of the U.S. market is, and that without it, they can forget about becoming the next Disney. 

So while Aron is right that this is a good opportunity for Carmike, he's understating just how important the deal is to his company -- and to Wang. Even though he said last month, "We don't work for Wanda," well, he kind of does.

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:
Daniel Niemi at dniemi1@bloomberg.net