That’s the likeliest explanation for Regal Entertainment’s startling announcement last night that it has put itself on the block. The board promises nothing, but hired Morgan Stanley to explore “strategic alternatives… which may include a potential sale of the Company.” It’s anybody’s guess what will happen. Regal could make a deal that radically changes exhibition, or do nothing. The outcome all depends on what billionaire Philip Anschutz, who controls 77.7% of the voting shares at the No. 1 chain, thinks about about the future of exhibition.
The 38th richest person in the U.S., according to Forbes, is famously press averse; don’t be surprised if he remains out of the spotlight. Regal CEO Amy Miles also made it clear in a conference call with analysts last night that she’ll keep mum about the company’s thinking. She firmly refused to answer questions about what several referred to as the “elephant in the room.”
But anyone who has taken Econ 101 can make a pretty good guess about what’s on Anschutz’ mind. He bought the company low more than a decade ago when he snapped up controlling stakes in Regal, United Artists Theaters, and Edwards Theaters after all three filed for bankruptcy protection. And now he wants to sell high. Theaters may never look better than they will in 2015 as Hollywood studios flood venues with potential blockbusters including sequels to hits such as The Avengers, Star Wars, The Hunger Games, James Bond, Fast & Furious, Jurassic Park, and Mission: Impossible.
If Anschutz wants to sell, the implicit message is that next year will be a blip, and then things will go downhill – or, at least, plateau.
He knows better than almost anyone the challenges that Regal faces. Sometime soon it will have cough up cash to install more luxury seating, an initiative that’s paid off nicely for rivals led by AMC Entertainment but may be less lucrative for the runner up in each market. The intensifying competition seems to explain why Regal’s per screen box office sales fell 16% in Q3 vs the period last year, much more than the industry average decline of 12.6%. Although Regal execs say that they don’t expect to significantly increase capital expenditures next year, “the risk is the need to accelerate plans to catch up if it falls further behind,” MoffettNathanson Research’s Robert Fishman says.
Meanwhile the entire exhibition industry is grappling with worrisome trends. Studios keep chipping away at theaters’ opportunity to offer new films before they’re also available on home video. The average window touched a new low of 3 months and 14 days in Q3 — down from 4 months and 4 days last year — the National Association of Theater Owners reports. No wonder theater owners are so alarmed by the recently announced plan to release Crouching Tiger, Hidden Dragon: The Green Legend simultaneously on IMAX and Netflix next year.
The dismal summer box office results this year also set off alarms. The quality of the films, measured by Rotten Tomatoes scores, as well as the number of releases “were in-line with or better than historical averages,” Cowen and Co analyst Doug Creutz found. As a result. “we regard the summer performance as yet another piece of evidence that domestic theatrical attendance is in secular decline.”
Even though next year’s ticket sales will be much stronger, theaters may not see a healthy share of the bounty. Studios will have the upper hand when its time to negotiate the all-important revenue splits for their potential blockbusters.
With all of those clouds hanging over exhibition, who might step up to pay more than $3B for Regal? Analysts are still scratching their heads over that one.
“There’s probably no buyer,” unless there’s an insurance company or private equity firm that might see the chain as an annuity, says Wedbush Securities’ Michael Pachter. But even that might not make sense: Cash flow buyers typically like acquisitions where they can boost returns by slashing spending, and “there is little opportunity to cut costs from this already lean and well-run company.”
Regal’s biggest competitors, AMC and Cinemark, might shy from the likely antitrust hurdles. The Justice Department “has been highly involved with exhibition deals,” Stifel’s Benjamin Mogil says. Other chains “do not have the scale or capital to lead such a deal.” Sumner Redstone’s National Amusements also probably wouldn’t want to fiddle with its holdings in Viacom and CBS to make a bid, especially since “there is not enough real estate at Regal to be of interest.”
That might clear the way for a wealthy foreign buyer. We’ve already seen China’s Wanda Group buy AMC — and know that others including Japan’s Softbank and China’s Alibaba are kicking some tires in Hollywood. Wanda’s deal showed that “if one wants to be in the U.S., then there are few opportunities of size and certainly none as large as this deal,” Mogil says. MKM Partners’ Eric Handler sees China Film Group, Shanghai Film Group, CJ Corp, and Latin America’s Cineopolis as other possible buyers.
But it all comes down to price. If Anschutz doesn’t see an offer he likes, then he can pull the plug on a sale — the way he did last year when he aborted the plan to sell his sprawling sports and entertainment unit, Anschutz Entertainment Group.
The show’s about to begin. But much of the drama will be hidden. And nobody will tell Anschutz to turn off his smartphone.