This Movie Ticket Costs Too Much
My list of mundane annoyances is too long for my own good. But one I just can't get over is the advertising we're forced to watch while waiting for movies to start. After paying $7 for a show the other day, I sat through ads for Coke (KO ), realtors, Coke, video games, Coke, discount dental bleaching ("$145 complete!"), Coke, nachos, Coke, organ donation, plus Coke siblings Sprite, Dasani, and Mello Yello.
This nuisance will worsen soon, as the nation's No. 1 chain of movie theaters, Regal Entertainment Group (RGC ), goes public. In an initial stock offering led by Credit Suisse First Boston, Regal expects to raise $284 million. Most of it will go to repay debt. But a chunk is earmarked for Regal's plan to turn its theaters into a satellite-linked digital network for showing ads every bit as sharp as those we see at home on TV.
Hateful as in-theater advertising may be, there are better reasons for saying "no thanks" if your broker tries to interest you in Regal shares. The company, controlled by Denver billionaire Philip Anschutz, is making good money and appears positioned to grow. The IPO is sure to add to the fortune Anschutz has amassed in oil, cattle, real estate, railroads, and telecom. But its terms also suggest that public investors will be paying a premium for something that they can find a lot cheaper elsewhere.
Anschutz assembled his theater operation by taking three individual chains--Regal Cinemas, United Artists Theatres, and Edwards Theatres--out of bankruptcy. Along with the rest of the industry, they suffered from the glut of screens brought on by a mid-'90s spate of megaplex construction. This year, Anschutz merged his three chains, set up headquarters in Knoxville, Tenn., and kept on Regal and UA CEOs Mike Campbell and Kurt Hall as co-CEOs.
Regal's executives were keeping quiet ahead of the IPO, but the registration statement offered a few financial details. If the consolidated company had operated in 2001 the way it does now, its 5,886 screens would have drawn 241 million moviegoers and $2 billion in revenue. Net income would have come to $53 million; EBITDA--or earnings before interest, taxes, depreciation, and amortization--would have hit $358 million. In this year's first quarter, Regal estimates it made EBITDA of $108 million on revenue of $522 million.
For future gains, Regal is counting on continuing operating efficiency and, as an added avenue of growth, linking its theaters by satellite. Such a digital network would let theaters become arenas for distance learning and corporate conferences. It also would permit live-action ads of much higher production quality than the dull slide shows common in theaters today. "You've got people in a dark room without a Tivo or a remote control, and you've got the ability to pump in ads via satellite," one industry investor told me. "It's quite an opportunity."
Maybe, unless it drives moviegoers to rival theaters. Not far from my home in Florida, for instance, Regal operates a nice, 10-screen theater. As of May 3, it will be competing with CinemaWorld, a new megaplex that has gone up less than four miles away. It has 16 screens and tiered, or "stadium," seating. CinemaWorld CEO Dave Fedeli sees small future in extensive in-theater ads: "This business," he told me, "is about selling movie tickets, popcorn, and soda."
In the IPO, Regal expects to sell about 14% of its stock at $17 a share. This indicates a market value of $2.2 billion, a bit more than one times Regal's 2001 sales. How does that compare? Regal's closest analog is AMC Entertainment (table), which did its own merger this year and operates the nation's second-biggest chain. True, AMC (AEN ) is burdened by somewhat more debt relative to its sales and cash flow. Its screens also are a bit less productive. Yet its stock is far cheaper, going for under 0.3 times sales.
Or forget the numbers, if you like, and just think about Regal's IPO this way: Phil Anschutz didn't get rich by buying cheap and selling cheap.