Category Archives: Analysis

UK’s Odeon For Sale Again – Third Time the Charm?

Odeon for Sale

Private equity group Terra Firma has announced that UK/European cinema chain Odeon & UCI Cinema Group (Odeon for short) is for sale. The merged exhibition operation failed to attract bidders willing to match the asking price in both 2011 and 2013 but Terra Firma’s chair Guy Hands is hoping that third time will prove the charm. Yet prospects for potential buyers are distinctly uncertain and Terra Firma has admitted that it may end up seeking a stock market listing instead.

Hands is quoted in a Reuters exclusive as saying:

“We will look to begin the process to sell Odeon towards the end of the year,” said Hands yesterday. “We are likely to appoint banks by May. Possible buyers could include US cinema groups or South American cinema firms, and private equity groups from Europe, the US, and China.”

The blunderbuss approach of targeting pretty much every potential buyer on the planet, while hedging your bets by reserving the right to do an IPO, could be faulted as demonstrating a lack of finesse or coherent sale strategy. It is also not clear what Terra Firma has to gain by announcing its intentions (emphasis on plural) this far in advance of even appointing a bank, unless it thinks it can instigate a feeding frenzy of suitors and bidders.

There is no asking price at this stage, but the figure of GBP £1 billion (USD $1.55 billion or EUR €1.36 billion) has been mentioned, which is less than the failed asking price of GBP £1.2 billion in 2011. The exhibitor has not reported income and profit for the 2014 financial year, but the 2013 figures reported last April saw profits before interest, tax and other charges decline 24% to GBP £69.2 million (USD $107.5 million) while sales shrank by 5% to GBP £706.7 million (USD $1.1 million).

A detailed valuation analysis of Odeon’s worth is beyond the scope of this article and the sort of things banks get paid big bucks to do. For a handy overview of the key metrics and tools for evaluation of (US) cinema exhibition operations we refer those interested to the Fulcrum Inquiries Valuation Guide: Movie Theaters. As a recent guide, Australia’s Hoyt’s was sold last year on undisclosed terms to a Chinese investor but had earlier been valued at AUS $900 million (GBP £473.9 million or USD $731 million) on the basis of revenue of AUS $550 million and profit of earnings before interest, tax, depreciation and amortisation of slightly more than AUS $80 million.

Using Hoyt’s as a model – not unreasonable, since the chain share many characteristics with Odeon – gives a valuation of somewhere between GBP £778 million to GBP £1.156 billion, which gives an average of GBP £967 million. Hands would be more than keen to round that up to a cool one billion pound sterling. But is Odeon worth it and who would buy it?

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AMC’s Premium Recliner Seating Plans Revealed

AMC recliner seats

A week after Regal announced that it plans to convert 25% of its screens to luxury seating, AMC has provided details about its plans for reseating. While the Chinese-owned exhibitor is not committing to a particular screen percentage target, the ambition is great for the cinema chain that in many ways kickstarted luxury reseating trend amongst the major exhibitors. AMC also continues to stress that reseating is only a part of its overall enhanced guest experience.

While attendance and box office was down for AMC in the forth quarter of 2014 (by 4.3% and 4.5% respectively), as well as for the year as a whole in line with the rest of the industry, the exhibitor managed to eek out an overall increase thanks to better concessions spend. AMC’s food and beverage (F&B) revenues per customer increased by 13.5% to $4.46 in the last quarter of 2014, a record high for the company.

Speaking at the Q$ 2014 earnings call (transcript by Seeking Alpha), CEO Gerry Lopez reminded the analysts listening in that when the reseating initiative was started three years ago it was not universally well received. “I don’t think I can use over an open line some of the adjectives and some of the names that we were called for this notion of taking two-thirds of the seats out of an auditorium,” he said. Yet today, “we’re seeing the same things that you are seeing which is everybody’s announcing them and everybody is doing them.”

At the end of the 2014 calendar year AMC had refitted or installed luxury recliner seats in 598 screens across 53 theatres, which represents an increase of 51% on the previous year. The reseated theatres are said to have delivered an increase in admissions of 13.8% on a per screen basis, compared to an average industry decline of 4.3%, in the last quarter of 2014.

Looking at the year as a whole, AMC claims that reseats delivered a 25.3% increase, compared to an industry slump of 5.6%. Taken together reseats thus delivered an 18 and 31 point outperformance for the quarter and the year.

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Regal To Convert Quarter of All Screens To Luxury Seating

Regal premium seat

Regal premium seats in Avalon, Alpharetta (photo credit: Jonathan Phillips)

The world’s largest exhibitor Regal has announced plans to convert 25% of all its screens to luxury seating. The move mirrors similar efforts by other large chains such as AMC and Marcus Theatres, and is an attempt to extract more revenue from patrons as cinema attendance declines in the United States.

The announcement came during Regal’s Q4 2014 earnings conference call when CEO Amy E. Miles gave an overview of plans for capital investments “to enhance the customer experience in 2015,” covering several areas including seating, concessions/F&B and more.

Regal installation of luxury recliner seats has been going on for some time, but was said to have gained ‘significant momentum’ in the last quarter of 2014. Significantly, a large enough installed base of luxury seating now exist to make meaningful year-on-year comparison in terms of revenue generated from premium seating.

Converted screens were said to be producing box office revenue growth in excess of over 40% for the first six weeks of 2015. While some of that can perhaps be attributed to the surprise success of “American Sniper”, one film alone cannot shift all converted screens. Overall box office was said to ‘only’ be up by around 10% in the same time period.

The success of the first wave of premium seating has led Regal to accelerate its conversion program, with 40 multiplex sites representing 500 screens scheduled to have their seats swapped out in the coming year. Ultimately Regal expects to outfit at least 25% of their screens with luxury seating.

Miles also discussed the “ low-cost, low-risk investment” to upgrade food and beverage offerings to offer greater food menu options and alcoholic beverages. Though not mentioned in the conference call, the latter may be “low risk” but still requires approval or local regulations to be amended and relaxed, which requires political action at the county or district level. This means that cinemas can only ‘convert’ to alcohol serving once they have local permission to do so, while the pace of rolling out luxury seating is Regal’s decision in conjuncture with the landlord. The “enhanced menu” will be rolled out to a further 65 locations in 2015, while Regal will offer some type of alcoholic beverage in around 80 properties.

Regal’s CFO David Ownby expanded on what the capex would entail in 2015 (transcript of the con. call by Seeking Alpha). “In light of the customer-focused initiatives Amy outlined earlier in the call, we expect our 2015 capital expenditures, net of asset sales and landlord allowances, to be between $135 million and $145 million.”

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EAO Releases European 2014 Cinema Statistics – Up, But Not Much

EAO Cinema Figures Europe 2014

A week after cinema trade body UNIC released its provisional European Cinema going figures for 2014, the European Audiovisual Observatory (EAO) has released its preliminary cinema figures at the Berlin Film Festival.

The figures show an overall slight upward trend for the EU as a whole, breaking a long pattern of decline, but only slightly and primarily thanks to strong box office in three major territories. Most west European territories reported a decline.

The Observatory estimates that total admissions in the European Union increased marginally by 0.6% to 911 million tickets sold, around 5.4 million more than in 2013 (906 million). The small increase was primarily ensured by a strong year-on-year performance in France and Spain which kept EU admissions from continuing their downward trend of recent years.

As in 2013, two thirds of EU markets experienced a decline in cinema attendance, while admission levels increased in only nine out of the 27 EU territories for which provisional data were available. The year-on-year increase was most pronounced in France (+14.8 million, +7.7%) and Spain (+10.5 million, +13.6%) with cinema attendance in both markets recovering from exceptionally weak results in 2013.

Although both UNIC and EAO figures are provisional, they come to similar conclusions, positing a 0.7% and 0.6% increase respectively for EU countries. UNIC sources its data from UNIC members while EAO data has been “collected with the collaboration of the EFARN (European Film Agency Research Network)” mostly from national film institutes and public audiovisual bodies.

UNIC represents exhibitors and trade bodies in 36 territories, but only published provisional data for 24. It did not yet have data for Belgium, Bulgaria, Cyprus, Greece, Hungary, Iceland, Malta (EAO also not), Montenegro, Macedonia, Romania or Slovenia, for which EAO has provisional data. Neither UNIC nor EAO covers Serbia, Bosnia, Belarus, Ukraine or Moldova. The omission of several Central and Eastern European territories from the UNIC figures misses out on some of the larger growth markets, as noted by EAO:

Apart from France and Spain, year-on-year growth in cinema attendance was only achieved in six Central and Eastern European member states, led by Poland (+11.2%), the Slovak Republic (+10.8%), Romania (+10.5%), Hungary (+8.4%) and the Czech Republic (+4.5%) as well as Belgium (+0.8%).

There were also some minor discrepancies between UNIC and EAO data for some contries reported by both, notably Germany, though this had to do with FFA only releasing its data on 9 February. For Sweden, for example, UNIC has +0.8% growth in BO but -1.7% decline in admissions, whereas EAO has +0.5% BO and -1.9% admissions. There is also a larger discrepancy when it comes to Russia’s BO and admissions, which UNIC sees as stronger than EOA does.

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Why RealD is For Sale and Who Would Want to Buy It

RealD Founders Michael Lewis and Josh Greer

RealD founders Michael Lewis, left, and Josh Greer wear 3-D glasses inside their theater at their Beverly Hills headquarters. (Ken Hively / Los Angeles Times)

Following a disappointing Q3 RealD has revealed that it has appointed investment banker Moelis & Co. to “explore a full range of strategic alternatives available to the Company”, which as Bloomberg notes is “language that typically means a company is seeking a buyer.” So why is RealD for sale (or is it really?), who would want to buy it and what would be the reason for wanting to acquire it?

The ‘For Sale’ sign was so prominent in the earnings conference call (transcript by Seeking Alpha) that it was effectively posted before the figures for the quarter were even mentioned:

We will be looking at the full spectrum of options available to us, including but not limited to mergers, divestitures, return of capital alternatives and a potential sale of the Company. Our previously announced review of R&D initiatives will be a part of this broader strategic review.

Cynics would say that RealD had every reason to draw attention away from the poor figures of the most recent quarter.

Revenue in Q3 dropped to USD $32.6 million compared to USD $55.4 million for the same period a year before, a decline of almost 41%. At the same time losses increased to USD $11.3 million compared to a loss of just USD $271,000 for Q3 a year earlier. Despite this the share price jumped over 10% and one analyst upgraded the stock to “Outperform”.

In the previous quarterly earnings call (transcript by Seeking Alpha), CEO Michael Lewis had already outlined previous steps to “enhance shareholder value”:

Moving beyond our quarterly performance. Over the past year, we have evaluated all aspects of our business and are taking additional steps designed to enhance shareholder value. In consultation with our outside advisors, we’re actively evaluating alternatives for restructuring our R&D efforts, Consumer; Laser; Screen and TrueImage. In doing so we have three primary goals, to minimize future capital outlays and expenses associated with our R&D efforts with an expectation of significantly reducing OpEx and CapEx in fiscal year ‘16; to partner with outside third parties to speed the path to commercialization; and to maximize our future economic participation.

It seems that these efforts of “streamlining” the company and finding “additional efficiencies” have not succeeded or been enough. So what is behind the drop and what would be the rational for a sale?

Part of the decrease is purely film-slate related. The same quarter in 2013 was strong with “Frozen”, “Gravity” and “Thor 2″, while this year’s “Hobbit 3″ was not strong enough and “Interstellar” was only released in 2D. But there were deeper underlying problems, as hinted at by CFO Drew Skarupe:

Product and other revenues decreased 41% from the prior-year quarter and represented approximately 36% of total revenues. The decrease was primarily related to decreased purchases from international exhibitors and the overall decrease in our box office performance over the prior-year period. Domestic product revenues represented 55% of total product revenues, and international product revenues represented 45% of total product revenues. Licensing gross profit was $9.5 million or 45% gross margin versus 68% gross margin reported in the prior-year quarter.

So is RealD merely ‘pulling a Regal’? Last year Regal stated that it was looking at possible buyers, after two quarters of disappointing figures. In the end the largest exhibitor in the US decided that it was not for sale and took themselves off the market. But whether it was serious or not in the first place, the company’s announcement gave several media outlets (us included) something other to talk about than the soft box office.

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UK Cinema Spending Habits and Intentions Revealed

YouGoc UK cinema spending 1

British polling company YouGov has published a report that details the spending patterns and intentions of UK cinema goers. The findings reveal regional variations and an overall positive outlook, though cost is a factor in some people choosing not to frequent the cinema.

YouGov’s Film and Cinema Evaluation report profiles individual cinema spending above and beyond the cost of the cinema tickets themselves. As well as covering obvious extras such as concessions and drinks, but also related required spending on ‘sundries’ such as parking (and babysitting?).

Perhaps not surprisingly the highest spending is in the capital, given that London has the most expensive cinemas as well as related real estate, parking, etc. Total spend is GBP £8.78 per head per visit in London, while the traditionally poor region of Wales has the lowest spend at GBP £6.86.

The study further broke down spending into categories based on frequency of cinema going.

The study assesses who is going to the cinema and with whom, when and where people go, what they watch and why and how much they spend. It also analyses how people find out about new films why they choose to watch what they do, what genres and actors different groups are interested in and how cinemagoers’ profiles vary film by film. YouGov spoke to over 5,000 people in the UK aged 16+ for the research.

YouGov found that not only do men (£8.29) spend more than women (£7.39), but that people who visit the cinema more frequently, typically spend more on items other than tickets (e.g. popcorn, drinks, etc.). “Heavy” cinema users have the largest outlay on sundries, spending an average of £9.15, compared to £8.02 for “medium” users and £7.04 for “light” users.

Perhaps not surprisingly “Heavy” users are more likely to be found in London, again either because London offers greater choice of cinema and films or because people who want a wide cinematic choice gravitate towards the capital.

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Wanda Cinemas Announces 2014 Figures & AAM Tech Deal

Wanda logo

Wanda Cinemas has published its first post-IPO figures for they whole of 2014 and they show overall growth in the number of screens and box office, though the exhibitor’s market share has slipped somewhat.

Win Business Network reports that:

Wanda Cinema’s 2014 box office revenue was 4.21 billion yuan [USD $674 million], an increase of 33.1%, with audiences 102 million patrons, an increase of 30.8%; Up to December 31, 2014, the company has already opened in 182 theaters, with 1,616 screens.

The corresponding data in January 2015 Wanda Cinema is realized grossed 380 million yuan [USD $60.8 million], an increase of 44.1%, with audiences 8,990,000 patrons, an increase of 36.6%, has been opened in 183 theaters, 1,624 screens.

However, Wanda Cinemas’ overall marketshare slipped slightly, after having grown for the previous three years.

In January this year, the State Press and Publication Administration of Radio Film Board has already grossed Chinese film last year had informed: 29.639 billion yuan [USD $4.75 million], an increase of 36.15%. This makes it possible to calculate the Wanda Cinema last year accounted for about 14.2 percent of the market.

Wanda Cinema’s market share data with the previous two years or less. According to the prospectus of the data Wanda Cinema, 2011 to 2013, Wanda Cinema’s market share was 13.61%, 14.49% and 14.52%, both the market first.

It is difficult to compare the figures and total takings with previous years accurately due to tax reforms in the past year that have impacted cinemas’ revenue. This is due to the total box-office deduction of 5% which goes to the “special movie fund”, and then there is a further 3.3% of the tax deduction, and only then do we get the net box office.

Wanda Cinemas continues to benefit financially – and enjoy an advantage over competitors – because of the close ties between Wanda Cinema and Wanda Plaza real-estate. This means that Wanda Cinemas are shielded from rising rents costs that affect other theatres.

However, this sort of arrangement only continue for as long as the real-estate market is strong and Wanda Plaza can afford to play corporate sugar daddy to Wanda Cinemas.

Now that both companies are listed companies there could be questions about this type of arrangement if the fortunes of the two companies start diverting. Though with the majority shares of both companies firmly controlled the Wang family, there is not much other shareholders can do to alter this cosy arrangement.

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Laser, the Next Big Digital Transition as the Xenon Lamp Fades Away

NEC laser projector

This year (2015) is definitively the year the world became completely digital as Sundance Film Festival announced that not one film shown was on celluloid-film. Most of the major markets are now completely digital. If you listen carefully, you can hear tens of thousands of cinema owners letting out a sigh of relief as they think now that the transition is over they can forget about it for the foreseeable future. Unfortunately this is not the case.

The use of lasers as a light source has been an interesting topic for many years. It has taken a change in government restrictions/regulations to put a rocket under laser, and it is literally taking off. We now have Barco and Christie with LPF (Large Premium Format) offerings. But more importantly, it is the NEC BPP (Blue Pump Phosphor) that is of most interest.

Recently Bill Beck, now at Barco, did a detailed techical presentation of Laser for SMPTE. After watching this presentation and a number of follow up Emails, it became clear to me that BPP-based laser projectors would flood that market in 2015.

NEC has shown BPP-Laser works well with small screen solutions.  This year we will see the next generation of BPP-Laser projectors based on more effective Blue Lasers allowing BPP-Laser based projectors to replace small, medium and potentially large cinema projectors. It was also made very clear that Xenon, at current prices, would quickly be overtaken by laser, making Xenon solutions obsolete.

This leads to a realisation of another equipment transition. If projector vendors stop making Xenon projectors, this would eventually lead to Xenon lamps no longer being manufactured, and we are back to a similar situation to film.

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Why North American Movie Ticket Prices Rose In 2014

Movie Tickets In Popcorn

A week after the investment firm PricewaterhouseCooper released a survey in which found 53% of its 1,000 respondents felt movie tickets cost too much, the National Association of Theatre Owners (NATO) reports that the average cost of a movie ticket in 2014 rose to USD $8.17.

That figure is a 0.50% increase from the USD $8.13 average cost of a movie ticket in 2013. Movie ticket prices roller-coastered in 2014 from quarter-to-quarter but generally stayed above the USD $8 mark. The second quarter saw price levels topping out at USD $8.33 before declining to USD $8.08 during the third quarter before rising once again to USD $8.30 for the last three months of the year. Fourth quarter prices were actually down year-over-year from USD $8.33 in 2013.

We have found these numbers, taken without considering any context or analysis, can be a bit misleading. For instance, many industry-watchers might assume the cost of a movie ticket declined in the fourth quarter of 2014 because exhibitors were lowering prices to attract audiences during a down year in attendance and box office. While that may account for a portion of the decline, it’s also helpful to look at the releases in theatres during the fourth quarter of both years.

In 2013, “Gravity” was doing blockbuster business on its way to Academy Award nominations and Oscar wins. Because the film was shot in 3D and with IMAX in mind, many moviegoers chose to see it in those formats, both of which come with premium ticket prices. On the other hand, in 2014, we had “Interstellar” on its way to doing decent business, which though popular on IMAX was not released in 3D, and “The Hobbit: The Battle of the Five Armies” which performed weaker than expected.

This of course is assuming that the average ticket price is calculated by dividing the period’s box office by its admissions. Historically however, NATO has conducted a survey of its members to determine the average ticket price for a quarter or year.

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Cinema in China Is Still Headed for Crash – Five Trends Show Why

Taking of Tiger Mountain

With Wanda Cinema’s IPO imminent we thought it would be a good to revisit the article ‘China’s Multiplexes Are Headed For a Crash – Statistics Show Why‘ that we published last April. With another year of strong box office growth in China and no large scale cinemas going bust in the Mainland, were we wrong?

At the time we wrote that “It is too early to say whether Chinese cinema exhibitors are in for a hard crash or a soft landing, but a correction is now becoming overdue.” It increasingly seems like 2015 will be the year that the correction is due, with several troubling indicators making themselves felt.

We will not re-hash the arguments from the original article, which remain valid, so we urge anyone not familiar with it to read it first. We will instead look at some new factors that we did not highlight back then.

It is also worth noting that at the time overall growth in China was slipping below 8% and now it has fallen even more. For the third year running China has missed its export target and as the FT reports,

The missed target comes as China prepares to release annual gross domestic product figures next week that will show growth in the world’s largest economy (in purchasing power terms) came in below the government’s annual target for the first time since 1998.

This is the macroeconomic picture to keep in the back of the mind when discussing the cinema market in China.

In broad strokes, the five trends can be summarised as follows:

  1. Mistaken belief in a demographic cinema dividend;
  2. Unsustainable price-war in micro-blog ticket services;
  3. Inability of Hollywood films to fill a post-quota gap;
  4. Failure of Chinese film production due to censorship;
  5. A ‘hidden’ decline in the growth rate of the box office.

1 – The demographic cinema dividend fallacy

Wanda Cinema is very confidant about the future growth of the China cinema market, as stated in its IPO document, which begins with the bold claim “The company’s main business is the cinema industry, [and] the [cinema] industry has always come out on top”:

Our cinema industry in the future continue to benefit from the rapid growth of the film industry

In recent years, China’s film market continues to maintain a rapid development momentum, the movie industry revenue is expected to usher in the 2015-2016 phase of explosive growth. We believe that our large population, the urban population has a number of screens compared with Europe and other developed countries, a big gap under the background of the geographical distribution of the theater, the per capita number of screens there is a large room for improvement, the cinema industry will continue to maintain a high level of development.

This is a refrain often heard in discussions about Chinese cinema: that the country is under-screened compared to markets in Europe or that cinema attendance is low compared to that in the US. As the market matures it will continue to grow, is the belief.

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