AMC Entertainment served up a popcorn tub of news today after the market closed: It announced terms of a deal to restructure its relationship with National CineMedia, part of the consent decree with the Justice Department to win approval for last year’s $1.1 billion acquisition of Carmike Cinemas.
The No. 1 exhibition chain, controlled by China’s Wanda Group, also says it resolved a lawsuit, not related to the deal, that incurred expenses requiring it to restate its Q4 earnings.
Antitrust officials insisted that AMC reduce its 17.4% stake in cinema ad sales company NCM to less than 5% to avoid a conflict with its chief competitor, Screenvision, in which Carmike owned a 19% stake.
That led to today’s complicated agreement — designed to satisfy obligations to both ad sales companies.
NCM chief Andy England calls the terms “a win for both of our companies and our shareholders.”
AMC’s Adam Aron says the agreement has “served to strengthen our long-term mutual commitment going forward.”
AMC will receive 18.4 million NCM shares to account for the additional Carmike theaters in its chain. But since they won’t use NCM, AMC will pay it a quarterly amount that reflects the estimated value of the ads that NCM would have sold.
Those terms will expire when the deal ends or they begin using NCM.
NCM will continue to sell ads for the theaters AMC owned before it bought Carmike, as well as any new ones it acquires in the U.S. — although acquired venues that already have deals with Screenvision will fulfill their contracts.
Some 17 AMC theaters will switch to Screenvision from NCM for pre-show ads for 10 years — and then return to NCM. To compensate NCM for the operating income it will lose, AMC will give back about 2.9 million shares plus 1.8 million units that they value at $25 million.
When all of the stock swaps are complete, AMC will gain 13.8 million NCM shares, worth about $175 million at today’s closing price.
All told, AMC will then own 24.9% of NCM while Regal Entertainment Group will own 17.9%, and Cinemark will have 17.5%.
AMC will have to unload a lot of that stock, although it agreed to hang on to at least 4.5% for the next 10 years. The ad sales company will help AMC sell its other shares in what the companies call “an orderly fashion” over the next 27 months.
In addition, AMC will pick up the tab for as much as $1 million of NCM’s legal and professional expenses tied to the deal.
The companies agreed to the complicated stock swap arrangements to keep tax payments low, and to preserve AMC’s tax loss carryforwards that it can use to reduce future payments to the government.
In addition to the new deal with NCM, AMC says that this week it paid $7 million to settle a longstanding, but otherwise unspecified, lawsuit. The company says it “believed it would likely win at trial,” but that the costs to defend itself “were expected to be significant.”
After accounting for taxes, the company added a $4.27 million charge to its expenses for the last three months of 2016 shaving 4 cents off its per share earnings.