Carmike’s Valuation Seen Luring Theater Buyers: Real M&A

Carmike Cinemas Inc. may offer the best value for U.S. movie-theater owners from Regal Entertainment Group to Cinemark Holdings Inc. that have stockpiled cash for takeovers.

Carmike, a Columbus, Georgia-based operator of about 2,500 screens, has the lowest enterprise value relative to earnings among the biggest publicly traded U.S. theater chains, according to data compiled by Bloomberg. A buyer would get a state-of-the-art chain already converted to digital and 3-D technologies plus entry into small-town markets so far ignored by larger players.

“Carmike would be a very attractive target” for the largest competitors, Eric Wold, a San Francisco-based analyst at B. Riley & Co., said in a telephone interview. “You’d immediately be getting top-quality screens” and there’s little chance of regulatory opposition because “their territories don’t overlap.”

Regal and Cinemark, the two largest publicly traded U.S. operators, say they’re on the prowl for deals to gain leverage with suppliers and studios. Regal’s cash rose to a 2 1/2-year high last quarter and Cinemark’s balance climbed to a record at the end of 2012, data compiled by Bloomberg show. AMC Entertainment Holdings Inc., which has the second-most screens among U.S. chains, already sold to China’s Dalian Wanda Group last year.

Tickets Dwindle

Carmike Chief Executive Officer David Passman declined to comment on the company’s takeover prospects. Representatives of Regal, Cinemark and AMC declined to comment on whether they would be interested in Carmike.

Although box-office sales rose to a record $10.8 billion last year, helped by higher prices for 3-D movies, the number of tickets sold was down 16 percent since peaking in 2002, according to Box-Office.

Consumers are turning to cheaper, in-home entertainment, fueling the decline. For instance, Netflix Inc.’s online service costs $7.99 a month and provides unlimited access to streaming videos of mostly older television shows and films. That compares with an average movie ticket price in 2013 of $7.94, according to the National Association of Theatre Owners.

Regal Chief Financial Officer David Ownby said that’s curbing ticket price increases and prompting his company and others to seek acquisitions.

“We know we’re competing with other ways to view content,” Ownby said during a June 6 phone interview from Regal’s headquarters in Knoxville, Tennessee. “We have to keep our customer in mind.”

Negotiating Leverage

By expanding, theater chains boost their bargaining leverage, helping them improve margins by winning better movie-rental rates from film studios and contracts with food vendors.

“Growth comes through getting bigger in a mature market,” Brett Harriss, a Rye, New York-based analyst with Gamco Investors Inc.’s Gabelli & Co., said in a phone interview. With theater deals, “they’re buying synergies, higher negotiating powers.”

Carmike offers potential buyers the lowest valuation among peers even after its shares surged 22 percent in 2013 through yesterday, according to data compiled by Bloomberg.

Its enterprise value stood at $476 million yesterday, compared with more than $4.4 billion at both Regal and Plano, Texas-based Cinemark. At that level, Carmike fetched 5.5 times earnings before interest, taxes, depreciation and amortization, versus the median of 8.3 in the peer group, which also includes Milwaukee-based Marcus Corp., the data show.

Accumulating Cash

Today, Carmike shares rallied 6 percent, the most in three months, to a five-year high of $19.36. Regal slumped 3.8 percent and Cinemark fell 0.6 percent.

Regal and Cinemark have accumulated cash to bolster their capacity for deals, data compiled by Bloomberg show. Regal’s balance stood at $395 million at the end of the first quarter, the most since September 2010. Cinemark had a record $743 million as of Dec. 31.

Last year, billionaire real-estate developer Wang Jianlin’s Dalian Wanda Group purchased AMC Entertainment, creating the world’s biggest cinema owner.

Regal, AMC or Cinemark “could eat Carmike without risk,” said Scott Grzankowski, an analyst for KDP Investment Advisors Inc. in Montpelier, Vermont.

Carmike CEO Passman may prefer to buy rather than get bought. On a May 6 conference call, he said he plans to build the chain from 244 theaters with 2,464 screens to 300 facilities and 3,000 screens through acquisitions and construction. Carmike has no plans to pay a dividend and will instead keep money for takeovers, he said.

Considering Options

“We are actively evaluating potential acquisitions and new builds,” Passman said on the call.

His larger peers are doing the same.

“As we look out over the next 12 months to 24 months, I do believe it’s a good environment for consolidation in our industry,” Regal CEO Amy Miles said during an April 30 conference call. On June 11, Cinemark CEO Timothy Warner said his company is “always on the lookout” for deals.

Gabelli’s Harriss agrees that the time is right for takeovers. “The industry is ripe for consolidation,” he said.

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