UPDATE with additional detail on investor call, 05:10 AM PST Monday December 16.
PREVIOUS STORY, 23:34 PM PST Sunday December 15: Exhibition giant Cineworld, which acquired U.S. chain Regal Cinemas in 2018 for $3.6B, is adding another group to its portfolio with a proposed $2.1B (C$2.8B) purchase of Canada’s Cineplex. The deal would see Cineworld pay C$34 per share in cash and would make Regal the largest cinema circuit in North America by number of screens. The acquisition is unanimously supported by Cineworld’s Board of Directors.
Cineplex is Canada’s biggest operator with 165 cinemas and 1,695 screens. The exhibitor holds a 75% market share of box office. In 2018, the Canadian box office grossed approximately $770M, with annual attendance of about 98M. Between 2014 and 2018 Canadian box office revenue and average ticket prices grew at compound annual rates of 1.9% and 3.5%, respectively.
Cineworld calls the transaction outlined today “Highly synergistic” bringing approximately $130M of annual pre-tax combination benefits by the end of 2021. There is expected to be a double-digit accretive to earnings and free cash flow in the first full year following completion (2021) and the return on invested capital is expected to exceed Cineworld’s cost of capital that same year.
A debt-financed acquisition, it remains subject to Cineworld and Cineplex shareholder approval, and other regulatory approvals. Completion is expected by the end of the first half of 2020. Cineworld’s largest shareholder (Global City Theatres B.V., which holds an approximate 28% stake in the company) has agreed to vote in favor of the acquisition.
Cineworld CEO Mooky Greidinger says, “Cineplex is a great business. It is the number one cinema operator in Canada and is well positioned for further growth. The combination of Cineplex and Regal will create the leading North American cinema operator with unrivalled scale and opportunity. By deploying our operational best practices, we expect the transaction to create compelling value for shareholders and to be strongly EPS and free cash flow accretive.
“The acquisition of Cineplex strengthens our belief in the theatrical business, one of the most affordable out-of-home forms of entertainment. We constantly strive to provide the best customer experience and maintain technological leadership and we are excited about Cineworld’s prospects for 2020 and beyond as we look to complete the Cineplex transaction, our U.S. refurbishment program and the rollout of Unlimited, and we look forward to the great selection of movies to come.”
Cineworld this summer launched movie ticket subscription service Regal Unlimited in the U.S., with a take-up rate that exceeded expectations.
Anthony Bloom, Chairman of Cineworld, added today, “The Board of Cineworld believes that the acquisition of Cineplex is in the interests of its shareholders as it fits squarely within our strategic acquisition objectives and is expected to be strongly earnings and cash flow accretive. Going forward our immediate post-acquisition objectives will be to combine Cineplex with our U.S. business to create a leading North American cinema operator; maximize the synergistic combination benefits of the Cineplex acquisition; continue the currently successful refurbishment of the Regal chain in the U.S.; and focus strongly on a structured debt reduction program targeting leverage towards 3x net debt/EBITDA by the end of 2021.”
In a conference call with investors, Greidinger later said that there will likely be some changes within management ranks but that there are no current plans for any Cineplex closures. “We’d like to keep part of the management with us,” the exhibition veteran said. “Some members of the Cineplex team have informed us of other plans.”
He said there wouldn’t be any changes to the terms of contracts with the studios as a result of the acquisition and confirmed that the company isn’t planning on listing in the U.S. anytime soon.
As for the 2019 and 2020 box office, Greidinger said, “I know there has been a lot of speculation about the 2020 slate. I think it is great. This year we had the biggest movie of all time, we had Joker, and I think Star Wars will break new records. This year wasn’t as good as expected due to many loopholes. In 2020 we don’t have an Avengers or Star Wars but there’s a combination of solid movies. We know James Bond will be number one in the UK next year. There’s Wonder Woman, two new Marvel movies, two from Pixar, the Chris Nolan film, and many other movies”
“Some estimate that this year’s domestic box office will be negative [on last year]. From our experience, it will be anywhere between -2 to + 2. Next year, there won’t be the same huge peaks but there are a number of strong movies. Family product is going to be big and we are optimistic about the North American box office.”
In response to a question about declining North American attendance for theatrical, Greidinger said that attendance remains largely “flat and stable” and that admissions growth potential was highest in emerging markets and where the company implements its Unlimited scheme. “The growth comes from new sites and new premium offerings,” he noted.