Universal and Cinemark announced a windows deal late Monday that shares a lot of traits with AMC’s breakthrough pact with the same studio earlier this year. It came after Cinemark was already implementing a “dynamic” approach to how long given titles stay in theaters given COVID-19 rates and theater closures in many markets. Though long resisted, these adjustments are seen as crucial to the survival of theaters once vaccines roll out in 2021 and the marketplace tries to reset.
Shares in Cinemark were flirting with $15 a share, up 4%, in mid-day trading. Imax, Marcus Corp. and Reading International, parent of theater brands like the Angelika, are also in positive territory. Shares in theater ad firm National CineMedia shot up more than 13%.
AMC remained the notable exception to the rally, with its shares off about 3% at about $3. Liquidity concerns continue to haunt the No. 1 circuit, though CEO Adam Aron has insisted that as many as a dozen investors would be capable of injecting needed cash if there are no improvements to the operating environment soon.
Eric Wold of B. Riley raised his 12-month price target on Cinemark to $14 from $11. In a note to clients, he said the AMC and Cinemark windows deals “not only provide an opportunity to move underperforming films out of the theater (where they are taking up valuable screens), but a new way to share in the economics of the film as it moves to the next distribution window.”
Under the multi-year deal between Cinemark and Universal Filmed Entertainment Group, a 31-day theatrical window will be maintained for any of the studio’s titles opening to north of $50 million at the domestic box office. Other franchise titles would also adhere to the longer window. The engagement would be 17 days on those opening to less than $50M. Universal also has the option to explore premium VOD, though Cinemark would share in those revenues.
Robert Fishman, an analyst with MoffettNathanson, looked at the 2019 box office to see how it would have played out under the terms laid out in the CinemarkUniversal deal. He found that about 70% of releases would have to screen in theaters exclusively for at least 31 days. In terms of the remaining 30%, he raised the prospect of films like Knives Out, which racked up $165 million in domestic grosses but may not have initially been deemed a “franchise” film since it was based on an original screenplay.
“If Lionsgate or other studios end up striking similar dynamic windowing deals with the exhibitors, would the studio have the patience and confidence to keep the movie exclusively in theaters past the first four weeks or would at least 50% of the box office be lost to PVOD or even potentially disappear altogether?” he wondered.
Fishman also said a major piece of the puzzle for the theatrical marketplace will fall into place on December 10, when Disney holds its investor day and updates its plans for theatrical releases.
Down the line, the business interests of studios and theaters are likely to further converge, Wold predicts, and that could bring some relief to the largest circuit.
“We would not be surprised if the recent termination of the Paramount Consent Decrees by the U.S. Department of Justice opens the door for Universal to provide a short-term equity lifeline to AMC to ensure that the studio’s largest theatrical partner remains intact and focused as the 2021 film slate increasingly comes into play with a COVID-19 vaccine,” the analyst wrote. “AMC management recently noted discussions with a dozen potential strategic investors on the 3Q20 conference call—and we do not see a logical reason to rule out Universal from those discussions given recent partnership strides.”
In a note issued Monday, before the Cinemark-Universal news, Wedbush Securities analyst Michael Pachter, who has an “outperform” rating on Cinemark and “neutral” on AMC, said he expects the worst is not over for theaters. Box office in the fourth quarter is trending 92% below year-ago levels, with full-year receipts off by 80%. More theater closures will test exhibitors in the coming months. Nevertheless, he said, his main takeaway from 2020 is that the unrivaled revenue potential of theatrical has been demonstrated by the marketplace.
“The silver lining to 2020 from a theatrical perspective is that studios have had the opportunity to test the feared PVOD window, with the results not as compelling for the studios as many had expected,” he wrote. “Studios have opted to postpone major releases into 2021 and later, indicating that studios by and large prefer a theatrical release over PVOD but will wait for a more normal environment.”