Carmike To Investors: Business Prospects Are Bad – And Could Get Worse

Something really odd is taking place at Carmike before shareholders’ June 30 vote on AMC Entertainment’s $1.1 billion (including debt) purchase offer that would potentially creating the world’s largest exhibition chain: Carmike management is talking down its business prospects.

In an SEC filing this morning, the company told investors that it “has no control or influence over some key business drivers, including box office performance, where recent published reports have suggested a soft second calendar quarter with negative implications for the balance of 2016.”

And in comparison to its rivals, Carmike says it has smaller scale and financial capacity to invest in theater upgrades, lower EBITDA/operating margins and per-screen financial metrics and no regular dividends.

The pessimism is designed to quash investors’ belief that Carmike settled for too low a price in March when it accepted AMC’s $30-a-share offer.

Leading shareholders Driehaus Capital Management (with nearly 10% of the votes) and Mittleman Brothers (with 9.6%) plan to vote no on the buyout, saying Carmike is worth more. Advisory firms Institutional Shareholder Services and Glass Lewis sided with them.

Others seem to agree: Carmike is trading today for $30.81, suggesting that buyers believe AMC’s $30 offer isn’t the last word.

But Carmike urges shareholders to take the money and run.

Remaining independent “is a much riskier proposition” for a “smaller company in a volatile industry facing secular headwinds and challenged growth strategy.”

They shouldn’t expect another buyer to step up. Carmike didn’t find an alternative despite “multiple market checks since December 2014 and … public speculation about a potential sale since at least March 2015.”

And Carmike’s likely to flop with its plan to grow by buying smaller theater chains.

The “pace of our acquisition activity has slowed to a point well below historical levels and our previous expectations, despite our intense focus on sourcing new targets,” the company said today. “Furthermore, Carmike must compete with its larger, better capitalized peers to acquire attractive tuck-in targets.”

Some analysts agree. For example, RBC Capital Markets’ Leo Kulp said this week that “AMC is paying a fair price” and there’s “significant downside risk for Carmike shareholders if the deal doesn’t go through.”

But it’s easy to appreciate investor skepticism about the dramatic change in Carmike’s tune from late February, days before signing its deal with AMC. CEO David Passman told Wall Street that he was “extremely pleased” with the company’s “record” results for 2015 and “optimistic about the prospects for 2016 and beyond.”

The board backed that up by authorizing a $50 million share repurchase. “Our strong financial position with over $100 million of cash on hand at year end affords us the flexibility to support both a share repurchase program as well as our growth initiatives including value building M&A opportunities,” the CEO said.

He saw plenty of acquisition possibilities.

“We’ve got over 8,000 screens owned by some 50 owners that would be prime candidates for consolidation in the industry,” Passman said. “As the big circuits get bigger, it’s harder and harder for the small circuits to keep up without having to invest some of their — if you will, some of their family capital.”

Regarding the box office, he acknowledged that the industry “will no doubt face challenging year-over-year comparisons” with 2015’s record sales.

Still, he was “quite optimistic” about 2016 — and especially beyond.

“I think 2017 will shape up very much similar to 2015,” he said. “There are just so many strong titles in ’17 that it can’t miss. The real question is how well will 2016 do relative to ’15 and how much more can ’17 do over that.”

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