AMC's Offering Looks Like a Must-Miss

 | Dec 18, 2013 | 12:00 PM EST  | Comments
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After the close on Tuesday, underwriters priced the shares of AMC Holdings (AMC) at $18 per share. This is the first time in nine years that the company has been traded publically. AMC is the largest theatrical exhibitor in the world. In a year full of exciting IPOs, AMC could be a rotten tomato.

The friendly folks at Bain Capital and Apollo Global Management acquired AMC in a debt-laden private-equity deal in 2004. AMC later acquired the Loews Cineplex chain. Last year, China's third-richest man, Wang Jianlin, purchased the whole kit and kaboodle for $2.6 billion, including debt. At the IPO price, AMC will have a value of $3.45 billion. (Not a bad one-year take for Mr. Jianlin!) The proceeds of the offering will be used to pay down debt and enhance the movie-going experience.

AMC owns 343 theaters with a total of 4,950 screens, primarily located in North America. The company's movie theaters can mostly be found in large cities such as New York, Los Angles and Chicago. In each of its top-five cities, the company has a commanding market share.

AMC plans to upgrade its theaters by adding more comfort and convenience, better food and beverages, expand its loyalty program and improve its screen and sound technology. In addition, the company plans to add targeted movie programming to its theaters. For example, Latinos, African Americans and Indians are some of AMC's best customers. They go to 6.4 times as many films as the average moviegoer. For the year ending Sept. 30, the company exhibited 80 Bollywood movies, and that helped it capture additional market share in the communities it serves.

To get Americans off the couch, AMC plans to install motorized plush recliners, a seat reservation system allowing customers to reserve a specific seat, a choice of 120 beverages, including beer and wine, and "seat side" dinner service.

The company is the largest IMAX exhibitor in the world, with 136 screens, all of which are 3D enabled, nearly twice the number as its closest competitor. The company has already spent $182 million over the last few years improving existing locations.

While the plans to attract more moviegoers and retain existing customers sound good, I have a few problems with the deal.

First, after the IPO is completed, Jianlin's Dalian Wanda Group will own about 80% of the company. I personally dislike companies that sell a sliver to the public and retain all the voting rights. So much for shareholder democracy!

Second, according to the prospectus, as of Sept. 30, the company had a significant amount of debt. With over $2.1 billion of debt, the IPO proceeds of $368 million will not make much of a dent in the debt. Because AMC has been through the private-equity wringer, it carries more debt than either Regal Entertainment (RGC) or Cinemark (CNK).

I've always been scared of Bain cast-offs. Despite what management says, you know that it spent the last nine years cutting expenses to the bone so it could make debt payments and line the pockets of the Bain and Apollo guys. In the last three years, total expenses grew less than 2%. I'm sure the company will have to increase capital spending more than expected to remain competitive and do all those renovations it plans. Who wants to be around for that "unexpected" announcement?

Third, according to estimates from MKM Research, AMC will increase top-line revenue just 8% over the next two years. In comparison, MKM expects Cinemark to grow revenue 18% and Regal to grow 14%. According to the prospectus, AMC increased revenue between 6.4% and 6.7% the last three years, and that makes MKM's estimates seem pretty aggressive. AMC isn't building as many new theaters as its competitors, so its growth is tied to overall box-office receipts, not new construction. In fact, between fiscal 2011 and the most recent quarter, the company closed a net of nine theaters.

Fourth, AMC operates mostly in large, expensive cities, such as New York, and that holds down profit margins. By comparison, Cinemark operates in low-cost cities and generates earnings before interest, taxes, depreciation and amortization margins of 23%, compared with just 17% for AMC.

I know on some level the IPO will be attractive. Regal and Cinemark have been strong performers. Regal is up 36% year to date, and Cinemark is up 22%. But is there room for a third publically held movie exhibitor in investors' portfolios?

After the initial few days of IPO excitement, I think AMC will turn out to be a flop.

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