AMC - AMC Entertainment Holdings

[Guest roark33]

This is such a joke and at the same time, something you would totally expect from the AMC CEO.  He is just flailing, looking for anything to survive....

[txvalue]

Cineplex out of Canada has a similar program where they offer discounts and promotions - things like buying a food combo giving you a rental voucher or "super ticket" where 19.99 gets you a theatre ticket and a digital download once the movie comes out on digital.

 

https://store.cineplex.com/

 

So this is meant as more of a loyalty play than tackling someone like Apple head on. Things like this & the NFL game streaming are initiatives to try to get that incremental 25m they targeted in their last round of investor meetings.

 

 

[txvalue]

Speaking of Cineplex. Cineworld is buying them out for $2.1B (USD including debt).  Cineplex has 165 locations and about 1700 screens. Movies are 80% of their business. Cineplex has 75% share on the Canadian market with just over 10% recliners installed across their circuit.

 

This deal looks to be about 15xFCF assuming it doesn't materially change. Looks like a potential acquisition to distract from subpar performance by Cineworld in my opinion.

 

AMC is trading at 3x FCF if you can look out to 2022.

[Guest matt@thesovagroup]

I just don't see where there is any FCF at AMC, everything is re-invested into capex, and the idea that it is growth capex just doesn't make any sense.  It's capex just to maintain their competitive position.  They haven't materially increased their operating earnings for years if you exclude acquisition-related increases. 

[Foreign Tuffett]

I just don't see where there is any FCF at AMC, everything is re-invested into capex, and the idea that it is growth capex just doesn't make any sense.  It's capex just to maintain their competitive position.  They haven't materially increased their operating earnings for years if you exclude acquisition-related increases.

 

I agree with you that the recliner chairs and other supposed growth capex initiatives were really maintenance capex since they didn't materially improve operating results. Industry-wide, all or nearly all the benefits went to movie goers, not the cinema operators.

 

 

 

[txvalue]

The renovation criticisms leveled are valid, but the domestic reseats are wrapping up.

 

I have spoken with a few private circuit operators to get a better read on this situation and their consensus is generally that AMC has good technology (compared to the avg. theatre), good assets/locations, subpar management with a note that their real estate deals leave a bit on the table.  Most view Marcus or Cinemark as the best public operators.

 

It is worth pointing out that they are all in this line of work so they feel that exhibition is here to stay for the foreseeable future. Some would be interested in domestic assets if AMC chose to cleave off anything, which is why I mentioned that idea a few posts back. I continue to think that AMC could carve out a set of screens for cash to start digging into the debt while giving the market some indication of what their assets are truly worth.  Management is clearly not receptive to this at the moment, but that doesn't mean that it doesn't make sense and maybe they will change their tune in 2020 if they don't ever IPO the Euro assets.

 

I read quite a bit about smaller circuits getting crushed, but most of the operators I have talked to are doing well. The 10-12 theatre level seems to help kick things into the next gear. One in particular I chatted with is just posting tremendous numbers. He has distributed 16x the initial investment over 10 years by picking up existing locations in various states and rehabbing them cost effectively. Speaking with them left me with a more favorable impression on exhibition moving forward and a regret that I had not found him early on when he needed capital...

 

In short I think AMC's assets and operations are fine, there is some room to tighten the belt with expenses and the debt obviously needs to be addressed but I think buying shares presents some opportunity. I have increased my position 3.5x over the past two months.

[Foreign Tuffett]

Thanks for the color txvalue

[HalfMeasure]

Curious to hear from those who are long - how are you thinking about valuation and catalysts to get to the upside vs. the downside given the debt load?

 

Also curious, who are reasonable acquirers for the European assets as well as the domestic U.S. assets?

[Guest matt@thesovagroup]

One thing to note, there is a big difference between small operators and larger, public companies.  I have owned a few theaters in the past and one of the best strategies is owning a theater in a one-theater city, where you do not need to do a lot of capex and people still come.  The lack of cash flow at AMC is because they are constantly upgrading the facilities.  The ROI on the capex has been vastly over-stated by AMC's CEO.  The ROI is basically zero when the capex is really just maintenance capex because Cinemark and Regal are doing the same upgrades.  They are spending money but really just running in place with their spending.  Aron is suggesting only $300m in capex in 2020.  It will be interesting to come back and look at the end of 2020 whether that number was achieved or he vastly underestimated the spending required to stay competitive. 

[txvalue]

One thing to note, there is a big difference between small operators and larger, public companies.  I have owned a few theaters in the past and one of the best strategies is owning a theater in a one-theater city, where you do not need to do a lot of capex and people still come.  The lack of cash flow at AMC is because they are constantly upgrading the facilities.  The ROI on the capex has been vastly over-stated by AMC's CEO.  The ROI is basically zero when the capex is really just maintenance capex because Cinemark and Regal are doing the same upgrades.  They are spending money but really just running in place with their spending.  Aron is suggesting only $300m in capex in 2020.  It will be interesting to come back and look at the end of 2020 whether that number was achieved or he vastly underestimated the spending required to stay competitive.

 

Cinemark and Regal are doing the "same upgrades" but at a much lower level. I have done work on this cobbling things together from public sources, conversations, presentations etc.  Over the past 5-6 years AMC has spent  50+% more per screen than CNK and the difference is even greater when compared to Regal.  Regal has run their chain for cash for years and their recent results are indicative of this chronic underinvestment. 

 

Another thing to keep in mind is that upgrading your circuit takes things offline for an extended period while renovations occur so as the CAPEX cycle winds down you should get additional lift from all of your screens being in service at once.

 

So to put this simply. AMC has an upgraded circuit and now it can dig in to start working their debt down to a more manageable number, they have also already taken the initial A-List hit as the program is over a year old now. Cineworld is actively adding to their debt load, they are way behind the pace on renovations, their domestic numbers are cratering and they have just introduced a subscription plan that will add to the pain already present. These renovations take time, so this is not something that can be instantly solved by Cineworld management and they are going to be under pressure for the next few years.

 

I think AMC will be fine in 2020 with the 300m level capex spend.

[HalfMeasure]

One thing to note, there is a big difference between small operators and larger, public companies.  I have owned a few theaters in the past and one of the best strategies is owning a theater in a one-theater city, where you do not need to do a lot of capex and people still come.  The lack of cash flow at AMC is because they are constantly upgrading the facilities.  The ROI on the capex has been vastly over-stated by AMC's CEO.  The ROI is basically zero when the capex is really just maintenance capex because Cinemark and Regal are doing the same upgrades.  They are spending money but really just running in place with their spending.  Aron is suggesting only $300m in capex in 2020.  It will be interesting to come back and look at the end of 2020 whether that number was achieved or he vastly underestimated the spending required to stay competitive.

 

Cinemark and Regal are doing the "same upgrades" but at a much lower level. I have done work on this cobbling things together from public sources, conversations, presentations etc.  Over the past 5-6 years AMC has spent  50+% more per screen than CNK and the difference is even greater when compared to Regal.  Regal has run their chain for cash for years and their recent results are indicative of this chronic underinvestment. 

 

Another thing to keep in mind is that upgrading your circuit takes things offline for an extended period while renovations occur so as the CAPEX cycle winds down you should get additional lift from all of your screens being in service at once.

 

So to put this simply. AMC has an upgraded circuit and now it can dig in to start working their debt down to a more manageable number, they have also already taken the initial A-List hit as the program is over a year old now. Cineworld is actively adding to their debt load, they are way behind the pace on renovations, their domestic numbers are cratering and they have just introduced a subscription plan that will add to the pain already present. These renovations take time, so this is not something that can be instantly solved by Cineworld management and they are going to be under pressure for the next few years.

 

I think AMC will be fine in 2020 with the 300m level capex spend.

 

Of the 300m level quoted by management, do you think their split is credible where they quote ~150m as maintenance CapEx?

[txvalue]

That is a bit of a complex question but I will try to answer simply:

 

Insiders, operators and investors give a slightly different answers but history shows about 3-4% of sales is needed based on various operators comments and the way Regal was run under previous ownership. If you listen to calls or attend investor events I think the truth is that AMC's recent "upgrades" were also taking care of some deferred maintenance, so all together I think the 150m is roughly right for 2020 given all of the factors in play and then the remainder of that Capex can be used for other things like Euro upgrades etc.

[HalfMeasure]

That is a bit of a complex question but I will try to answer simply:

 

Insiders, operators and investors give a slightly different answers but history shows about 3-4% of sales is needed based on various operators comments and the way Regal was run under previous ownership. If you listen to calls or attend investor events I think the truth is that AMC's recent "upgrades" were also taking care of some deferred maintenance, so all together I think the 150m is roughly right for 2020 given all of the factors in play and then the remainder of that Capex can be used for other things like Euro upgrades etc.

 

That's helpful - 150m would be roughly in-line with the low end at ~3% of sales then and the higher end would be ~220m at 4% with some variance depending on the state of the footprint. So 150m might be on the lower end of maintenance, but also not unprecedented.

[ArminvanBuyout]

Interesting analysis on AMC; http://yetanothervalueblog.com/2019/12/yet-another-guide-to-media-stocks-the-intro-and-cord-cutting.html

[given2invest]

Interesting analysis on AMC; http://yetanothervalueblog.com/2019/12/yet-another-guide-to-media-stocks-the-intro-and-cord-cutting.html

 

different AMC

[txvalue]

That is a bit of a complex question but I will try to answer simply:

 

Insiders, operators and investors give a slightly different answers but history shows about 3-4% of sales is needed based on various operators comments and the way Regal was run under previous ownership. If you listen to calls or attend investor events I think the truth is that AMC's recent "upgrades" were also taking care of some deferred maintenance, so all together I think the 150m is roughly right for 2020 given all of the factors in play and then the remainder of that Capex can be used for other things like Euro upgrades etc.

 

That's helpful - 150m would be roughly in-line with the low end at ~3% of sales then and the higher end would be ~220m at 4% with some variance depending on the state of the footprint. So 150m might be on the lower end of maintenance, but also not unprecedented.

 

@ The Citi conference this afternoon this exact question was asked and the CFO reiterated maintenance cap ex as 150m for 2020, and also mentioned capex next year could be 250-300m rather than just 300m. Clarified that off that 300m they would expect an additional 100m of landlord contributions. So 150m maintenance and 250m discretionary.

 

Also mentioned that they want to pay down debt organically but they have noted there are buyers willing to pay high multiples for assets and that it would not be out of the question to put up "non strategic" assets for sale as a way to pay down additional debt. I took the comment to mean theatre assets but they do own real estate as well.

[HalfMeasure]

That is a bit of a complex question but I will try to answer simply:

 

Insiders, operators and investors give a slightly different answers but history shows about 3-4% of sales is needed based on various operators comments and the way Regal was run under previous ownership. If you listen to calls or attend investor events I think the truth is that AMC's recent "upgrades" were also taking care of some deferred maintenance, so all together I think the 150m is roughly right for 2020 given all of the factors in play and then the remainder of that Capex can be used for other things like Euro upgrades etc.

 

That's helpful - 150m would be roughly in-line with the low end at ~3% of sales then and the higher end would be ~220m at 4% with some variance depending on the state of the footprint. So 150m might be on the lower end of maintenance, but also not unprecedented.

 

@ The Citi conference this afternoon this exact question was asked and the CFO reiterated maintenance cap ex as 150m for 2020, and also mentioned capex next year could be 250-300m rather than just 300m. Clarified that off that 300m they would expect an additional 100m of landlord contributions. So 150m maintenance and 250m discretionary.

 

Also mentioned that they want to pay down debt organically but they have noted there are buyers willing to pay high multiples for assets and that it would not be out of the question to put up "non strategic" assets for sale as a way to pay down additional debt. I took the comment to mean theatre assets but they do own real estate as well.

 

Appreciate your thoughts. Didn't even think of the potential for landlord contributions, which at 100m would be very significant.

[txvalue]

This thing is now trading at 2x cash flow...

 

The deal they made with Silverlake was just an awful job by the outgoing CFO.  To top it off he crushes the theatrical exhibition space every time he talks by flubbing easy questions, he should get claw backs on his compensation for creating a deal that provides an incentive to crash the share price. Really looking forward to him getting put out to pasture in February.

 

That being said it has created a wonderful setup and operationally the company is just fine. Capex cycle complete, 2021 looking like a bumper crop of films, huge short interest and impossible to borrow for a reasonable rate.

 

On top of that if the share price gets turned around there is an additional tailwind, in addition to short covering they can prevent additional dilution on the SL deal.  The only rational I can see for the deal they made (besides insanity) was some sort of misdirection on Wanda to wrestle away control from them eventually.

 

I'd like to see some action to take the share price head on some mix of the following: cut the dividend, dig into debt, look into asset sales and reasonable prices, get the euro partial IPO back on the table, start a small buyback program etc.  There is no reason this is not a $20 stock, you can hate the box office and still find value here. EV is now less than CNK despite being much larger from a circuit perspective and revenue.  If I were CNK and I thought I could get it passed by regulators I would take a run at AMC here.  I don't know if there is enough float for a more known activist to step in, but really surprised that some of the sharp smaller funds haven't taken a look at this setup and tried to burn the shorts with all these factors in play.

[HalfMeasure]

If I were CNK and I thought I could get it passed by regulators I would take a run at AMC here.  I don't know if there is enough float for a more known activist to step in, but really surprised that some of the sharp smaller funds haven't taken a look at this setup and tried to burn the shorts with all these factors in play.

 

Do you have a view on the DOJ's motion to nullify the Paramount decree?

[txvalue]

Re: the ruling my main takeaway is that studio bundling, block booking etc. could further disadvantage smaller theater chains that don't have the scale to push back a bit so an exhibitor bulking up helps.

 

I think there is less risk for CNK, Regal, AMC who control about 50% of the US screens together. Most of their theaters are also larger so playing a certain less popular movie to get access to the new blockbuster is not as much of an issue as it may be for a 6 screen small town theater for example. When I chatted with smaller operators there was concern that it had the potential to ding their business.

[Foreign Tuffett]

This thing is now trading at 2x cash flow...

 

The deal they made with Silverlake was just an awful job by the outgoing CFO.  To top it off he crushes the theatrical exhibition space every time he talks by flubbing easy questions, he should get claw backs on his compensation for creating a deal that provides an incentive to crash the share price. Really looking forward to him getting put out to pasture in February.

 

That being said it has created a wonderful setup and operationally the company is just fine. Capex cycle complete, 2021 looking like a bumper crop of films, huge short interest and impossible to borrow for a reasonable rate.

 

On top of that if the share price gets turned around there is an additional tailwind, in addition to short covering they can prevent additional dilution on the SL deal.  The only rational I can see for the deal they made (besides insanity) was some sort of misdirection on Wanda to wrestle away control from them eventually.

 

I'd like to see some action to take the share price head on some mix of the following: cut the dividend, dig into debt, look into asset sales and reasonable prices, get the euro partial IPO back on the table, start a small buyback program etc.  There is no reason this is not a $20 stock, you can hate the box office and still find value here. EV is now less than CNK despite being much larger from a circuit perspective and revenue.  If I were CNK and I thought I could get it passed by regulators I would take a run at AMC here.  I don't know if there is enough float for a more known activist to step in, but really surprised that some of the sharp smaller funds haven't taken a look at this setup and tried to burn the shorts with all these factors in play.

 

I don't agree with blaming the outgoing CFO for the Silver Lake deal. A quote from him from a January 2018 conference: "Our leverage is high, and we want to bring it down."

 

I think Wanda, which ultimately controls the company, was the driving force behind the Silver Lake debacle.

[txvalue]

It is obvious that Wanda exerts heavy influence behind the scenes.

 

I find it hard to believe that 600 million (or the desired dollar amount which I believe was less) could not have been raised through a less complicated transaction even if there was a time sensitive element.

 

So I agree with you about the mechanics and pressures of why a deal like that happened, but I do blame him for not doing something else. There are plenty of options here - if I put you in charge of the company I am confident in short order you would have made a better decision - whether it was selling off some assets or issuing normal debt when they refinanced loans recently etc.

 

Heck, give me a loan of a few hundred million at 7-8% interest over punting 30% of the entire company's equity.  It is a CFO's job to get it right on these sorts of transactions and if we knew that Wanda was under pressure and a cash crunch then a CFO of one of their companies should have been more prepared.

[JRM]

Am I reading correctly that 55% of the float is short?  That seems excessive.

[txvalue]

You are correct, the numbers are slightly higher than 55%. The borrow is extremely high as well, I am not lending out my shares but I’ve been contacted by a brokerage who wants to lend them out. Some have reported retail accounts in the mid six figures are being offered 15%+ and then of course the shorts pay the 11% dividend on top of that.

 

Lots of speculation on why the short interest is so high at around 30m shares at such high rates. I have my thoughts but I’ll let others draw their own conclusions.

[JRM]

What brokerage do you use?  I have a retail margin account with TD Ameritrade.  I didn't think they would offer a premium for a shorted stock that I was long.