The announcement earlier this morning that Vue International is acquiring Germany’s CineStar chain from Australia’s Event Hospitality & Entertainment (Event or EVT) caught the European cinema industry by surprise. It shouldn’t have. Not because all parties had not done a good job at keeping the negotiations a well-guarded secret. Rather, it was a deal that made strategic sense to both parties equally, with the timing critical and a valuation that was reasonable. But it does require a hefty dose of optimism about the future prospects of the most challenging of Europe’s major theatrical markets; Germany.
Under the terms of the deal Vue pays Event EUR €130 million (GBP £114.9 million or USD $149 million) upfront from existing cash resources and EUR €114m (GBP £102 million) of pre-secured debt financing. Vue will subsequently pay Event a ‘variable consideration’ of up to €91.8 million, meaning that the deal could end up being valued at close to EUR €222 million (GBP £196.3 million or USD $254 million), though most likely less. In return Vue secures multiplexes in 55 sites across Germany, with two more under construction and opening in the next 12 months, with a total of 449 screens. It is the largest of the 14 acquisitions (!) that Vue has undertaken in its 15 years of existence.
The fact that CineStar was for sale was one of the worst kept secrets in the industry. When Jane Hastings took over as CEO from David Seargeant in 2017 a review was carried out of all of Event’s assets. “As the new CEO I am looking at everything. All assets are being reviewed as part of our long-term strategy. Our Germany cinema business is part of that review,” said Ms Hastings to Australia Financial Review in August of last year. Event tried to somewhat walk back that statement earlier this year, saying that Event spinning off or selling its German cinema operation was “purely analyst speculation.” The surprise was rather that CineStar would end up being bought by the parent company of a local competitor.
Below we examine the implications and dynamics of this deal and how its fits into the larger global cinema consolidation trends.
Why Vue Had to Buy CineStar
CineStar is an important and timely win for Vue, not just because it is the biggest deal that the circuit has ever undertaken. Vue was previously said to have been in the running for acquiring Odeon & UCI, as well as the Nordic Cinema Group, but both went to Wanda’s AMC instead. Since then it has had to watch Cineworld swallow up Regal and even Kinepolis buy Canada’s second-biggest chain Landnark Cinemas, while the most recent merger deals Vue announced were for the handful of screens of Ireland’s Showtime and Poland’s Cinema3D. Meanwhile there were no updates on Vue’s plans to be part of the first wave of exhibitors opening cinemas in Saudi Arabia, despite early pronouncements to that effect. Unfairly or not, there was something of a perception that Vue was falling behind or running out of steam, just at a time when the long-rumoured sale or IPO was due to take place.
With the CineStar deal Vue has once more confirmed its place as one of the undisputed Big Three exhibitors in Europe alongside Cineworld-Cinema City and Odeon & UCI. Yet it was also the only logical buyer for CineStar. Odeon is pre-occupied with refurbishments and integration of its European circuit to want to expand its existing footprint in Germany, that was anyway likely to overlap more with existing screens than Cinemaxx. Cinworld is still digesting its Regal purchase, while still primarily targeting Central and Eastern Europe for organic growth. Meanwhile overseas rivals were unlikely to want to take the Australian’s place: Korea’s CJ-CGV is focusing on growth markets like Turkey and Russia (despite temporary market downturns); Mexico’s Cinepolis just announced a strategic partnership in Indonesia instead of venturing beyond its small existing Spanish-speaking comfort-zone in Europe, while China’s number two chain Dadi is still staying at home.
While Vue is understood to have looked at opportunities outside of Europe, such as India’s PVR, the present course of action seem to be to strengthen its grip on the continent, which is spread west-east from The Netherlands to Poland and the Baltics, as well as north-south from Denmark to Italy, with Germany squarely in the middle. While it is Vue’s 14th acquisition, it should be remembered that there are few significant take-over targets left in Europe. Putting aside the three big French chains, the only credible potential acquisitions are Poland’s Helios (but Vue’s Multikino presence would prevent such a deal), Austrian-Balkan Cineplexx, Belgian-Canadian Kinepolis and after that only smaller chains like Switzerland’s Kitag. (That’s not to say that any of them are presently for sale.)
Why Event Had to Sell CineStar
The writing was on the wall for CineStar’s Australian ownership as soon as soon as new CEO Jane Hastings announced a root-and-branch review of the sprawling entertainment and hospitality empire that spanned Australia, New Zealand and Germany. The share price of Event doubled between 2014 and 2016, growing from around AUD $8 to AUD $16, but after that it has been treading water, swinging between AUD $12.40 and AUD $15.30 in the past 12 months, while currently at AUD $14.10. The problem with CineStar is that it did not contribute to economies of scale for any of Event’s other businesses on the opposite side of the globe (surprise, surprise).
With German box office down around 18% this year compared to the same period in 2017, the CineStar operation would have been a drag on the balance sheet of Event come end of the financial year. As such it made sense to sell the operation before the BO annus horribilis could make its ugly mark. As the final price of CineStar will be tied to the BO performance over a given period, it is likely to fall short of the maximum €221.8 million possible pay out.
Even at the maximum level, the deal will still have been significantly cheaper than for example AMC/Odeon’s acquisition of Nordic Cinema Group, where a bidding process pushed up the price to USD $929 million. This works out to over USD $2 million per screen, compared to the USD $533,000 per screen that AMC paid for the Odeon & UCI circuit. By comparison, Vue got CineStar for €494,432 (USD $567,437 – at current exchange rate) per screen at the maximum ‘variable consideration’. Since the final price is likely to be lower, whether by a large or small amount, it means that it could end up being cheaper than Odeon & UCI, though swings in exchange rate and the ‘Brexit discount’ that AMC got make a proper comparisonshard. The fact that 40% of the final price is variable and linked to BO is noteworthy, but could ‘spare blushes’ for Event management, in case it ends up being below the €200 million mark come 2019.
The upshot is that Event got a fair price at a good time and Vue did not end up over-paying. Everyone should come away from this deal smiling, even though it still has regulatory hurdles to clear, with Vue’s CEO Tim Richards confirming to Celluloid Junkie that “We have yet to enter into those discussions with the Federal Competition Authority.” Significantly CineStar and Cinemaxx have an overlapping footprint in cities such as Augsburg, Bremen and Magdeburg, not to mention multiplexes just a few hundred meters apart in Berlin’s Potzdammer Platz, where both are at the epicentre of the annual Berlinale (Berlin Film Festival).
Which cinemas will have to be sold off and who might buy them is as yet unclear. The merged Cinemaxx-CineStar will overtake Germany’s Cineplex (no relation to the Kinepolis-owned chain in Canada) as Germany’s largest cinema operator, controlling around 25% of the market, while also facing Odeon’s UCI and smaller chains like Kinopolis and Filmpalast. But already we can discern who will be impacted by the merger, which we will turn to next.
Winners and Losers
Opinions about the deal amongst those in the German cinema industry that we spoke to (anonymously of course) are split between seeing it as good or bad for the market. As in any deal, there are obvious winners and losers, but the bigger question is whether the deal as a whole has a net positive contribution to the industry. Let’s look at each in turn.
CineStar is a Pepsi customer – one of the largest in Europe after Cineworld – but Vue and Cinemaxx are with Coke, meaning that CineStar is likely to switch to the Coca-Cola camp. CineStar uses Vista ticketing software, but Cinemaxx uses Compeso (and Mikros/Oracle for F&B), even though Vue is a Vista client. When Vue merges CineStar and Cinemaxx it is likely to want to only use one software and this could be the reason for Vue to push its subsidiary to adopt Vista as well. While the loss of CineStar will barely be a blip on Pepsi Co’s P&L sheet, for Compeso a loss of Cinemaxx will be a blow, as it represents a fifth of the 1,600 screen it has in its domestic market. Cinemaxx is also one of Compeso’s single largest customers.
A merger between Cinemaxx and CineStar will also most likely mean an end to CineStar’s corporate headquarter in the picturesque Hanseatic city of Lübeck, where it has been since 1948 (80 year this year), when it began as Kieft & Kieft Filmtheater. Australia’s Greater Union stepped in as 50% partner for multiplex expansions in 1998. In 2003 the circuit absorbed the UFA cinemas and the following year the Australian owners acquired full control of the circuit. Cinemaxx’s headquarter is a short train ride away in neighbouring Hamburg, but it is unclear how many CineStar employees will be asked to make the move or commute to the long-term rival.
There are also likely to be redundancies amongst Hollywood and local distributors who will have one less large chain to negotiate with – this as the impending Disney-Fox merger creates its own set of redundancies. Most likely there will be a knock-on effect for other vendors too. Last year CineStar announced a deal with Ymagis’ CinemaNext and renewed its pact with RealD, and while Vue is unlikely to start ripping out projectors, there can be no certainty for any of CineStar’s existing vendors. It also remains to be seen whether Vue will expand its practice of aggressively under-cutting ticket prices of multiplexes in competitive local areas, as it is already doing in the UK and increasingly in Germany and Poland, even while competitors like Odeon & UCI focus on subscription schemes and dynamic pricing, which Vue eschews.
In summary, one German industry expert considered the deal as a vote of confidence and “a positive statement for the German cinema market,” and that there is “an advantage for CineStar to have a strong link to an cinema exhibition company based in London (not Australia, which makes it easier).” However, another insider said that the shake-out from this consolidation could have un-intended negative repercussions for the German market as a whole as the number of players shrink in number but grow in size.
Buying and consolidating cinemas in Europe’s largest economy might seem like a no-brainer, but Germany is not the same leader in the European cinema sector as it is for the automotive industry. In fact, the German exhibition industry has been spluttering for some time and some fear it is running out of gas. Last year Russia became the leading European cinema territory in terms of admissions (212.2 million), compared to 122.3 million for Germany. France outperformed Germany both in terms of admissions (209.4 million) and box office (EUR €1.38 billion – to Germany’s EUR €1.05 billion), while the UK remains the region’s biggest box office market with GBP £1.27 billion).
This year Germany (alongside neighbouring Austria and Switzerland) has seen a decline of around 18% to 19% year-on-year, with the last quarter very unlikely to prevent a full-year double-digital decline. The abysmal performance has variously been attributed to the long warm summer, the World Cup, lack of domestic hits and long-term under-investment. More worrying the German Federal Film Board (FFA) predicted in 2015 that the country was entering a decade of permanent decline, with an annual -2% drop [‘if only’, many German exhibitors now groan] as audiences grow older and cinema going frequency and habits decline. There is of course also constant finger-pointing at Netflix, even though this year’s FFA study found that streaming video service subscribers go more often to the cinema than the wider German population in General.
This means that Vue will have to do more than just change the branding of CineStar and switch out Pepsi for Coke if it is to reverse that decline. Tim Richards seems to indicate this in the press release announcing the deal when he states, “The acquisition of CineStar supports our strategic and business objectives of developing and owning the highest quality cinema assets globally. We look forward to further investing in the estate and welcoming CineStar into the Vue Group.” While Vue’s existing Cinemaxx propoerties are not all on the same level as the former JT cinemas in Holland or even many Multikino in Poland, Vuer has demonstrated with its work on its refurbished multiplexes in the UK and Italy that it is prepared to go a long way to bring the latest comforts, technologies and retail innovations to cinemas that were cutting edge a while ago.
We asked Tim Richards directly today about whether it made sense to invest in Germany at this stage, particularly with the market taking a nosedive this year. His response to us was as quick as it was positive:
We are very confident about the future of the German market, which played a significant role in our decision to acquire CineStar. This acquisition creates Germany’s first true national cinema circuit and major national brand and will reshape the German cinema landscape. While it’s been done at a time when the German market is at a low point, this proves even more so our confidence in the future of this important market.
The CineStar acquisition will also be a welcome distraction form questions as to why no Saudi cinema deal has materialised. Speaking to The Guardian today, Tim Richards said that the deal was on ‘hold’ and that “we have delayed, but not pulled out” – although anybody would be wise to hold off any Saudi-related announcements given the current geopolitical turbulence following the killing of Saudi journalist Jamal Khashoggi in Istanbul. Richards also revealed that he won’t be going to the ‘Davos in the desert’. Meanwhile industry insiders tell Celluloid Junkie that Vue may have become hostage to other geopolitical conflicts, with the deteriorating Saudi-Canadian relations possibly at the heart of why Vue, with its Canadian CEO and owned by Canadian pension funds (OMERS and Alberta Investment Management Corp.), is having a fraught path on the cinema front in the desert Kingdom.
Once the CineStar deal is closed it should enable Vue International to re-focus on the twin-track plans of a public listing or strategic sale. The good news is that it is a mathematical near-certainty that 2019 will be a growth year in the German cinema market, just as this year was a bounce-back for North America, meaning that the CineStar acquisition will look even better once it gets through the current bad year.
So is Vue wise to catch a falling CineStar? Going against the crowd can be profitable, whether catching a falling star or a proverbial knife, as per The Motley Fool’s description of ‘What is a Falling Knife‘:
According to Brandes Institute, catching falling knives can be lucrative. It found that between 1986 and 2002 falling knives posted a higher bankrupt rate over the three-year period following their initial drop.
But it also found that falling knives outperformed the overall market by a wide margin. Their conclusion was that investors who never catch falling knives may be foregoing significant opportunities.
Whatever the outcome, it won’t mark the end of Vue’s expansion and growth. When we asked Tim Richards whether Vue is looking at possibly buying other cinema chains, his response was a unambiguous, “Yes absolutely. International expansion is a significant priority for the business and we remain committed to organic growth and to acquiring leading exhibition companies internationally.” We thus continue inching ever closer to our 2015 prediction of just six global cinema mega-chains: Cineworld and Vue based in Europe, Cinepolis and Cinemark in the Americas, and Wanda (AMC) and CJ-CGV in Asia.
UPDATE: This article was amended on 23 October to correct that CineStar uses Vista software, while Cinemaxx uses Compeso, not the other way around as was originally written. Vue uses Vista.