AMC Entertainment (NYSE: AMC) stock is down a stunning 67% over the past year. The movie theater industry has not only had to deal with an underwhelming box office but also long-term concerns over the rise of streaming video and the potential for a shortened first-run movie window.
AMC's fall has been even more severe than that of other large theater chains, however, due to its high level of debt. As of the end of the recent quarter, AMC had a whopping $4.3 billion in debt. Including capital leases, the number is almost $5 billion. That's very high, considering AMC has a market capitalization of just $1.5 billion. That debt load was due to AMC buying three other theater chains over the past year -- Carmike Cinemas, Odeon (in the U.K, Germany, Austria, and Spain), and Nordic Cinemas -- on the way to becoming the largest cinema chain in the world.
On top of its debt load, AMC is also planning to spend $500 million renovating many of its theaters to plush recliner seating and building 22 more new theaters in 2018. On top of that, management is also committed to its $0.80 annual dividend, as well as a $100 million buyback program it instituted last quarter. That's going to require some serious cash.
Relief in Europe?
The roll-up of the three other companies has left AMC with many assets, however, which it can use to offset some of its liabilities. Earlier this summer, amid a terrible second quarter for the business, CEO Adam Aron pointed to about $400 million of assets the company could monetize to raise cash, including real estate, as well as the company's stake in Open Road Films, a small production company. On the third-quarter call, however, Aron also pointed to another avenue it was exploring -- an initial public offering of the company's European assets.
The term arbitrage means buying one asset for cheaper than you can simultaneously sell it in another place. That's what AMC sees with regard to its European assets. Obviously, with the huge decline in AMC's stock price, the company trades at a low overall Enterprise Value to EBITDA ratio.
On the third-quarter call, Aron said, "It has not escaped our notice that even though European public markets value movie theatres at double-digit EBITDA multiples, we are not seeing such valuations for our European assets at these levels when they are buried within AMC."
Therefore, the company is contemplating an initial public offering for its European theater segment on the London Stock Exchange.
Aron said AMC would only sell one-quarter to one-third of its assets in the theater chain, and would thus retain control of the European company. So how much money could that raise?
In the first three quarters of this year, the company's European assets generated 12.4% adjusted EBITDA margins and made up over 21% of the company's total EBITDA. Should the company make $850 million in EBITDA this year, which is within the current guidance range, but down from the previous guidance of $860 million to $900 million, Europe would likely account for almost $200 million of that.
Therefore, if the company sells one-third of the European company at double-digit EBITDA multiples, AMC could rake in a cool $600 million to $700 million.
What to look for
Of course, a sale of the assets would also mean losing some of those nice earnings, and the company has not said if it would go through with the IPO for sure. If it were to occur, it would happen at the end of 2018 or the beginning of 2019. If AMC goes through with the sale, it could indicate that the company feels the need to raise cash quickly, which might be a bad sign. On the other hand, if the company gets a great price for those assets, it could go a long way toward alleviating shareholder concerns about AMC's debt.
AMC shareholders can't be happy with the company's recent results, but it's doing several creative things in both its theaters and with its capital allocation. I'm more optimistic about AMC's prospects for 2018, in light of all these options and the returns it is getting on its renovated theaters; however, if the box office continues to deteriorate overall, no amount of financial engineering will matter. Here's hoping Star Wars: The Last Jedi does what we all think it will.
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