On July 15th Carmike Cinemas Inc. delayed a vote on whether to accept an acquisition offer from AMC Entertainment Holdings of USD $1.1 billion. The original shareholder vote was to take place on June 30th but was rescheduled for the mid-July date. The vote is now set to go forward on July 25th. If approved, the merger would create the largest cinema chain in North America, if not the world.

While we generally don’t like to play guessing games here at Celluloid Junkie when it comes to ongoing business transactions, especially one with so many moving parts, we felt the AMC-Carmike merger has some financial machinations worth explaining to our readers. As such, the following is our analysis on the latest shareholder vote delay mixed in with a few scenarios at how the deal could play out.

Another Scheduled Vote, Another Delay
When Carmike announced their intention to call off the second scheduled shareholder vote on the AMC takeover, they said publicly it was due to “ongoing discussions” between the two companies. Because this news came a few days after AMC announced their GBP £921 million (USD $1.199 billion) acquisition of the European cinema chain Odeon & UCI, many Wall Street analysts and media outlets took this as a sign that the company planned to up it’s offer for Carmike. (Keep in mind, all these valuations include the assumption of existing debt.)

Certainly, an increased purchase price is one likely basis for delaying the shareholder vote. While we have no way of knowing a precisely why the vote was called off, here are a few possible reasons:

• Under pressure from specific shareholders, AMC is preparing a bid for Carmike at a higher valuation, as many seem to be speculating.
• Carmike realized a majority of its shareholders would not vote for the merger and needs time to strategize or convince existing shareholders.
• AMC intends to negate the influence of Carmike shareholders who oppose the acquisition through a technical securities process.
• AMC plans to include stock in addition to cash in their offer and needs time to sharpen their pencils on the deal.

Again, these are broad stroke guesses and none of them may be in the least bit accurate. Alternatively, the truth might be found in a combination of these assumptions.

Upping the Ante
The timing of AMC’s rich acquisition of Odeon & UCI, just a few days before Carmike was set to vote, actually helped prove the point of shareholders such as Mittleman Brothers, LLC and Driehaus Capital Management, LLC who have been arguing that the USD $30 per share offer for Carmike was too low. According to Mittleman, the Odeon deal has AMC paying more for less; USD $1.2 billion for 2,236 screens across 242 locations at Odeon, as opposed to USD $1.1 billion for Carmike’s 273 locations made up of 2,954 screens. What’s more, the 2015 adjusted EBITDA of Carmike was higher than that of Odeon, making the enterprise value a tad peculiar.

Mittleman stated in a July 15th press release:

…how can $40 per share for Carmike (6.4x EBITDA cost to AMC) be unthinkable in one’s lifetime, but paying 9.0x EBITDA three days ago for a substantially less profitable enterprise is somehow a “bargain” as AMC called it

That AMC would pay 9.0x EBITDA post synergies for the less profitable Odeon-UCI, but only 5.0x EBITDA post synergies for Carmike at $30 per share, is nothing short of a slap in the face to CKEC shareholders.

After the Odeon deal was made public, Mittleman convincingly argues that there is no logical explanation for how AMC can purchase two major corporations in the same industry “of comparable size, economic characteristics, and prospects, at the same time, but for vastly disparate valuations”. If it were up to AMC, they probably would have preferred not announcing the purchase of Odeon until after the Carmike deal was closed or completely abandoned, however their hand may have been forced when the British Pound collapsed after the Brexit referendum vote.

Struggling to Reach a Shareholder Majority
Delaying the vote for a second time makes it appear as if Carmike did not have the shareholder support (more than 50%) required to approve the AMC acquisition. This very well may be true, given that Mittleman and Driehaus own 17.6% of Carmike stock and were definite “Against” votes. When other shareholders learned about AMC’s offer for Odeon, more might have started to believe the naysayers, making the Carmike board question whether they could achieve a majority “For” vote.

Shifting the Majority
So how does AMC overcome all those shareholders who oppose their offer, whether a majority or otherwise? They stack the deck in an attempt to ensure the number of shareholders willing to vote “For” on the deal outnumber those in opposition. This can possibly be done through a bit of a securities technicality.

Here is an oversimplification of how this might work; if AMC were to make an offer that was incrementally higher, say to USD $33, then it might mean the terms of the deal were modified significantly enough that the record date for stockholders entitled to vote could also be changed from its present date of May 18th. The new record date would be one in which more short-term investors (such as arbitrage and event driven funds) who purchased Carmike’s stock for the uptick caused by the AMC acquisition would be allowed to vote. Obviously these shareholders would want the merger to take place and be more than happy to take the USD $3 per share more than they had expected when initially purchasing Carmike’s stock.

According to Mittleman:

It would be a cynical lure to quick-buck artists, but otherwise a non-starter that any sentient shareholder should reject emphatically. We would view any change in the record date to be utterly indefensible and likely to provoke litigation.

And should there be any doubt that short-term investors amount to any significant portion of Carmike’s shareholders, the company’s stock closed at USD $31.13 on Friday. That’s more than USD $1.13 over AMC’s current offer, which means Carmike would presently be better letting investors buy its shares on the open market than taking AMC’s buyout. (Granted, without AMC’s present offer on the table, Carmike’s stock wouldn’t be as high, and would undoubtedly decline should AMC pull out of negotiations.)

Regardless, Mittleman is serious in their reference to litigation, going on to warn:

Were Carmike’s Board to endorse a record date change under these specious circumstances, we would view that action as a clear violation of their fiduciary duty and loyalty to shareholders, and would strongly consider taking legal action to hold Board members personally accountable for such an unnecessary accommodation to AMC’s attempt to buy Carmike’s shares at a price that we’ve shown to be ridiculously inadequate. We would also consider seeking immediate injunctive relief in Delaware to halt such an unjustified change in the record date.

Those two dreaded words, injunctive relief, would surely quell the acquisition entirely, since it would become mired in judicial litigation for an indefinite period of time. Still, there is no guarantee a court will side with Mittleman, and thus it remains a viable solution to wrangle Carmike shareholders.

Make Shareholders Willing Participants
Those Carmike shareholders who oppose AMC’s current offer have always expressed disappointment that the acquisition was an all cash deal and did not include any stock in AMC. The lack of such remuneration (that is if AMC stock does well post-merger) was only highlighted when AMC acquired Odeon, as Mittleman was quick to point out:

Odeon-UCI shareholders get ongoing participation in the upside of the combined entities via substantial AMC stock in the merger consideration; Carmike’s shareholders get no AMC stock.

In their last press release, Mittleman wasn’t shy about conveying their desire to become shareholders in a combined AMC, provided it is:

…at a price that at least approaches some semblance of fair value. To that end, we would embrace an offer of $37.50 per share, if 50% of the consideration would be AMC stock.

Indeed, during a recent conference call with analysts, Adam Aron, chief executive officer at AMC, acknowledged that the company could add stock to their cash offer for Carmike, should they wish to decrease leverage.

How Does the Story End?
As we write this on the eve of Carmike’s next scheduled shareholder vote, any attempt at prognosticating how events will play out in AMC’s acquisition of the company is a fool’s errand. While Carmike shareholders against the current AMC offer make some valid arguments that the valuation of the deal doesn’t make financial sense, neither does paying too much for the cinema chain. As AMC has previously said, acquiring Carmike comes with its own set of financial headaches:

…the Carmike transaction’s value to AMC is materially reduced by the value leakage from regulatory driven theatre and other potential divestitures, tax implications regarding the receipt of National CineMedia, Inc. founders shares and required annual make-whole payments to be made to NCM, as well as significant company integration and transaction costs.”

Our best guess would be that AMC comes back with a higher offer financially, by a few dollars, in order to better Carmike’s current stock price (for goodwill) and adds some stock to the deal to give current shareholders some skin in the game. The transaction could mirror the Odeon acquisition of a 75/25 cash vs. stock offer. It’s hard to imagine AMC offering Carmike more than 25% of the purchase in stock. Likewise, it is improbable that the per share price will rise to the USD $37.50 Mittleman is hoping for, and instead will hover around USD $33 or $34.