|Shares Out. (in M):||11||P/E||NM||42|
|Market Cap (in $M):||1,396||P/FCF||NM||NM|
|Net Debt (in $M):||5,111||EBIT||288||352|
|Borrow Cost:||Tight 15-50% cost|
AMC is a short because:
a) US box office is about to peak in 2019, for forever
b) its #1 supplier (DIS) is merging with its ~#4 supplier (FOX), significantly increasing DIS’ market share from ~1/4 to ~1/3, which increases film rent expense at AMC
c) major studios such as DIS and WarnerMedia are launching direct to consumer “over the top” movie apps at 2019YE, which should lower the amount of films to be monetized through theatrical in the future, as well as significantly increase the risk of a shortening theatrical window
d) AMC Stubs A-List, its subscription program akin to MoviePass, is cannibalistic to existing sales and burdens the AMC P&L with
e) net leverage at 6x with no deleverage plans, already exhausted all sale leaseback / asset sale options
f) negative FCF for the past few years despite ever record box office environments
Historically, the way to trade exhibitors has been to short them on theatrical window / terminal value concerns causing multiple de-rate (like in 2017 with premium video on demand, and the subsequent subsiding of such concerns on the long side), and on box office numbers revisions (like in 1H18 when it became increasingly clear that Black Panther and Avengers: Infinity War would significantly outperform estimates).
Going into 2019, the trade is to short the exhibitors (both CNK and AMC) trading on peak multiples (8x EBITDA and 7x EBITDA are their historical relative highs) on a peaking US box office that may very well be peak box office – not just for this economic cycle, but for forever. Multiple significant events in 2019 are poised to alter the industry for forever: DIS/FOX merger, studios going DTC – both of which would structurally alter economics for the exhibitors for the worse. For AMC in particular, given it has net leverage close to 6x EBITDA, it’s not too crazy to assume a 1x or more EBITDA contraction if street is convinced that we are indeed facing forever peak box office and a challenged terminal value. As a thought exercise: investors are willing to value challenged cable nets like VIAB and AMCX at ~6.5x EBITDA and broadcasters at ~7x EBITDA despite them continuing to grow advertising and affiliate / retrans revenues for some time until the bundle breaks. Exhibitors trading at 8x (CNK) and 7x (AMC) by comparison are complacently valued. I think once investors realize that exhibitors will peak earnings earlier than cable nets and broadcasters and that the peak year is in 2019 – that would force several EBITDA turns of contraction. The levered play here to express the multiple contraction is AMC at 6x net leverage (vs. CNK at 2.5x). AMC is trading at 7x EBITDA currently. I think there’s a likelihood that equity could be worth close to zero with some multiple contraction.
DIS / FOX: with China approving the merger earlier today, DIS / FOX received the last regulatory greenlight to consummate the merger. With the 20th Century Fox studio under DIS, DIS’ market share is poised to increase from ~1/4 to ~1/3.
Under Disney ownership, 20th Century Fox studio’s output can manage the box office calendar better with Disney so as to stagger hits on nonconflicting times, as well as bargain for a higher film rent split from the exhibitors. See below how a more concentrated office results in higher film rents.
Next, studios such as Disney and WarnerMedia are launching their own over the top apps by year end 2019 as counterweights against NFLX. While tentpole releases are still likely to be shown through the theatrical window, it’s likely that the mid and lower budget movies would not be shown through the box office at all, instead opting via their OTT apps. For example, Disney announced that their “Lady and the Tramp” remake will only be distributed via their OTT app, Disney+, and not through the theatrical window. As we progress through 2019 and 2020, it’s likely that Disney and WarnerMedia would announce an increasingly high amount of films to be distributed via only their OTT. Removing mid to lower budget films from the box office have two negative effects for the exhibitors: a) total gross box office is likely to decline over time as the number of films available at theaters decline, and b) an increasing concentration of films at the box office towards only a fewer number of tentpole films increases supplier power and raises film rents.
Tentpole releases on the other hand are unlikely to shift away from the theatrical window, given theatrical showings monetize better than OTT (if a family of four watches a Star Wars movie, all four members buy $10 tickets each, vs. if the same family watches the film on Disney+ on one $ monthly subscription). However, even such tentpole films are likely to pose a risk to exhibitors over time. Fox’s and Universal’s output deals to HBO are set to sunset around 2022. Given studios are trying to reorient themselves closer to the consumer with an OTT offering, there’s a high likelihood that Fox (via Disney) and Universal would rescind such pay 1 output deals from the market and distribute via their OTT platforms instead. In this scenario where studios are increasingly pulling back their library and output away from third party distributors and making it exclusive on their own platforms, the windowing transforms from:
Status quo: Theatrical > TVOD / DVD > pay 1 > cable / broadcast > pay 2
… to that of…
Possible future: Theatrical > studios’ OTT apps
In this world, the studios are incentivized to shorten the theatrical window as short as possible from the current ~90 days so as to get their latest films into the OTT apps, which the studios recognize as their growth engine in the future. Currently ~80-90% of box office ticket sales are monetized via the first 4 weeks of theatrical. From an economic perspective, there is no reason why theatrical windows need to be 90 days other than the fact that the oligopolistic exhibitors demand it; they know that a shortened window is an existential threat since consumers are much more likely to opt to wait to watch movies at home on TVOD if theatrical windows were shortened to say, 1 month. Studios never had the incentive to significantly shrink theatrical windows (not even during PVOD discussion days). I think 2019 will be the year where studios, spearheaded by Disney/Fox and Warner, finally try to shorten the window to sweeten their OTT’s value proposition.
AMC in particular face additional idiosyncratic issues: Stubs A-List, 6x net leverage with no remaining deleveraging levers, and negative FCF despite record box offices year after year.
Stubs A-List is AMC’s form of MoviePass, where consumers pay $20-22 per month to watch an essentially unlimited number of movies. The economics work like this for AMC: a consumer pays $20 to AMC and watches 4 movies during that month. AMC pays ~50-55% film rents to the studios based on an assumed ~$10 ticket price, or $20 to the studio (4 movies * $10 ticket * 50% film rent). AMC would make zero profit from this consumer. The timing of the AMC’s Stubs A-List launch during summer 2018 coincided with the start of the demise of MoviePass, which started restricting the number of movies consumers can watch per month. While MoviePass bled subscribers, Stubs A-List absorbed those subscribers. These are not high NPV subscribers that AMC wants to take away from MoviePass. These are frequent, negative NPV moviegoers. Additionally, this is a bad trade for AMC. MoviePass pays full ticket fares to exhibitors and AMC experience variable upside with more frequent moviegoers, while under Stubs A-List, AMC takes on the full burden of frequent moviegoers. Management told us during the 3Q18 call that the moviegoing rate has started declining since launching during summer 2018, towards their target moviegoing frequency of 2.5x / month which will help them generate accretive earnings from the program, but don’t be fooled. September and October are the lowest seasonal months for moviegoing. November and December are the highest seasonal months for moviegoing, meaning they didn’t have visibility as to whether moviegoing was declining to a sustainable level during their 3Q18 call held in early November.
Cash flow situation - they haven’t generated any positive FCF over the past 7 quarters (besides the 3Q17 working capital benefit). [looking at this time period because they’ve done acquisitions beforehand]. This is despite 2017 and 2018 being record box office years! How would AMC fare in 2020 and beyond if we are right in that box office peaks for forever in 2019?
Their 6x net leverage is a big issue. They’ve done all the sale leasebacks they could execute. They wanted to sell Odeon, their European cinema business, by IPO-ing a stake during 2H18 / 1H19, to help delever, only to announce on the 3Q18 call that this would get pushed to 2H19 / 2020, if at all, given poor financial performance at Odeon. If poor financial performance is the reason for pulling the IPO, I don’t think the passage of time would help Odeon as studios increasingly go DTC over time and pull films away from the box office.
Lastly, AMC management are not good capital allocators. They recently levered up from 5.5x to ~6x net leverage by issuing a convert to Silver Lake and using proceeds for a dividend recap and repurchased shares from Wanda (to provide them for an exit). Very irresponsible when they have already been persistently generating negative FCF.
Without any more asset sales to help delever from 6x net leverage and a persistently negative FCF profile, faced with a potential forever peak in box office in 2019, suppliers consolidating and suppliers circumventing around theatrical to launch DTC, I think AMC is a compelling short at 7x EBITDA.
DIS/FOX merger, launch of OTP services, time.
|Entry||11/20/2018 09:03 AM|
Good write-up. It increasingly does not make sense for movie studios to spend large amounts of money on production and marketing, compete for opening weekends, and then pull the movie from public consumption for 90 days to abide by the theatrical window. Packaged media likely continues to decline as a source of downstream monetization, and if the value of the movie in the home video market is going to be derived from licensing to SVOD, which I think is increasingly going to be the case, that value will be enhanced if the movie shows up on the platform earlier-i.e. closer to the time that the consumer demand is high-which means the window needs to shrink. In the last week alone, three movie companies (Blumhouse/A24/Paramount) announced that they are going to produce films for streaming platforms (Amazon/Apple/Netflix). Other than Disney, virtually no movie studio has been able to consistently grow its revenue and profit through the model of theatrical distribution due to the unfavorable economics of the theatrical release model for the studios (competing for opening weekend/growing P&A spend/difficulty predicting consumer acceptance of any given title). Now, there are technology platforms that allow studios to monetize their film assets with more visibility--so while they may give up some of the upside in success, I would expect more studios will allocate capital to wholesaling films at a guaranteed margin rather than gamble on theatrical, other than with the giant tentpoles. This is going to drive more product to the streaming services.
I said this on the other thread about AMC, but I don't think it is fully appreciated what a huge strategic shift it is for Disney to pull its output from the pay-1 window (i.e. end the licensing deal with Netflix). Disney makes a lot of guaranteed margin on licensing in the pay-1 window (reported at 200-$300mm per year)----not only does this provide visibility, it also drives more viewing of Disney titles in the lucractive home entertainment market. For Disney to pull this content and make it exclusive to its service, to me increases the likelihood that Disney will eventually go day-and-date, or at a minimum, seek to shorten the window, even with the large tentpoles. You are right about the economics of monetizing Star Wars through four discrete tickets---versus having it be included with the subscription. But I think over the long-term, Disney is going to want to build a large, valuable and global direct to consumer business-----and it is not going to get there without investing a lot of money in new tentpole content. What it will give up in terms of box office, it is going to gain in terms of consumer data and customer lifetime value which will help it build and sustain a subscription business with better economics than theatrical distribution. Bob Iger is not going to signal this today--and the existing model works well for Disney. But the question is whether it can build a better model by going direct to consumer with its highest value content--and I would argue that it can. Wholesaling films to theaters where Disney has no control over pricing, no control over the merchandising of the product, no consumer data all while being forced to window the content is going to become relatively less attractive rather than controlling pricing, controlling merchandising, and having a direct relationship with the customer. Also-with Disney controlling so much of the domestic box office post Fox, it is going to have enormous leverage over the theaters. The theaters are now basically dependent on one supplier for the majority of the best product-which does not seem like a healthy dynamic.
AT&T owning Warner Bros and Comcast owning Universal also support your argument. I am going to be suprised if either of those companies do not work to change the theatrical window given that they both have connectivity businesses that might benefit from access to high-value exclusive film product early in its life. AT&T is going to be unsentimental about this Both companies were distracted this year with deals--but going forward, I don't think either of them is going to be happy with the status quo.
I think this short too often gets framed as movie theaters are going to die, which I don't think is the case. A lot of people will keep going to movies for a long time. But it is not a good business and it is probably going to become increasingly challenged. Attendance will shrink because the model does not accomodate modern consumer behavior (on-demand/total control over experience) and new technologies are going to offer film companies more ways to directly monetize movies earlier in the life of the movie.
|Subject||I'm a convert|
|Entry||11/20/2018 10:28 AM|
I largely agree w/ your short writeup but I will add one more thing that I think the investment community has been ignoring:
When AMC completed it's major mergers in spring of 2017, they put out a deck in June 2017 showing what pro forma the combined company would do based on 2016 EBITDA. It was well over $1b in EBITDA (I think closer to 1.05B because one of the European acquisitions was not included in the number). This EBITDA number included no synergies.
Bulls have argued that EBITDA has plummeted from the 2016 numbers due to theaters being out of commission for cap ex upgrades, amomgst other things. I think not only does this argument not make a lot of sense (it's now been years and theaters go out and then come back in so it shouldn't be a continued year over year hit) but I would argue that the numbers are showing that this "growth" capex which they say brings on huge returns is either not returning anything or just masking a huge decline in the legacy business.
The biggest bear case for AMC is 2018 was supposed to bring a rebound in the box office and it did just that but the numbers are nowhere near the 2016 numbers. I mean 100s of millions below, despite box office being higher than 2016 and a ton of money poured into "growth" refurb cap ex.
The 2nd biggest bear case is Adam Aron is a terrible, promotional, CEO whose capital allocation has been atrocious, as mentioned in this writeup. I'm not sure you can point to one thing he's done that has turned out positive (any of the acquisitions, subscription business, silver lake deal).
I still stand by that box office revenues will be fine for years to come - I just don't think the economics will necessarily be there for the exhibitors. The subscription business has presented a new risk (and opportunity?) that I think is pretty risky given they didn't have studios on board and are paying them under the old method.
|Subject||Re: I'm a convert|
|Entry||11/20/2018 09:35 PM|
I think you are remembering wrong. The June 2017 investor presentation is still on the website and shows (on page 17) LTM as of 12/31/2016 Adj EBITDA of $842 for AMC, Odeon and Carmike before synergies (synergies estimated at $45MM). These numbers do not include Nordic.
The 2016 pro forma EBITDA turned out to be $903.9. So if the business had stayed constant it would be doing $954MM . (904 MM + 45 MM Odean & Carmike Synergies + 5 MM Nordic Synergies).
Capital IQ shows EBITDA estimates for 2018 of 891.
However, AMC did $665 in the first nine months of 2018 versus $652.8 million in 2016. Analysts are expecting EBITDA of only $237 MM in Q4 2018 versus $288MM in 2017 and $251.1 million in 2016. I guess the difference is there is no Star Wars movie in 2018 and there was in 2017 and 2016. But that said, AMC's margins on Star Wars films is lower than other films and box office Quarter to date is running 19% ahead of last year and 16% ahead of 2016. Projections I have seen for 2018 suggest $2.8 to $2.9 billion in box office for Q4 in-line with 2017 and 2016 (at $2.89 and $2.8 billion respectively). So if revenues should be similar and margins higher then analysts estimates are probably too low. My guess is EBITDA comes in around the $950MM 216 #, which wouldn't be great but much better than expectations and 2018 was a mediocre year for Europe (world cup) and many theaters are off-line due to renovations. Also, given the sale lease-backs, rent is not comparable.
I agree that leverage is too high. Once recliner opportunity is captured, the cash should be forthcoming. I do believe they are making a mistake paying a dividend. They should be using the cash flow to reduce debt. But its Wanda's ship, and they want the cash.
I wouldn't totally slam Aron for capital allocation. He did sell $1.05 billion worth of stock in the high 20s/low 30s. The market cap of all the Class A shares now is less than $750 million. So, while the deals may not be obviously a success (yet), the financing of them was.