by Robert Cain for China Film Biz
May 13, 2012
Another major announcement from China got Hollywood talking last week when Dalian–based Wanda Cinema Line revealed that it has initiated discussions to acquire the 5,048 screen U.S. cinema circuit AMC Entertainment.
The notion of a Chinese company controlling America’s second largest theater chain took many by surprise, and raised lots of questions. But before we speculate too much about what changes a Chinese operator would bring to U.S. movie theaters, a more immediate question comes to mind: does this deal even make sense? Would Wanda truly benefit from owning AMC, or is this merely another example of Chinese chest-thumping that will ultimately amount to nothing?
Let’s look at the following facts:
It has been widely suggested that AMC’s valuation is $1.5 billion, but that figure would put the company at a value of less than $300,000 per screen, far below the level of the two other large, publicly traded national chains, Cinemark ($711,000 per screen) and Regal ($595,000). Even though AMC was unprofitable last year, losing $83 million on revenue of $1.93 billion in the 39 weeks ending December 29, 2011, its profits have likely bounced back with the strengthening of the U.S. box office in 2012. Given recent market trends, Wanda would likely have to pay top dollar for AMC.
2. Acquiring AMC would be dilutive. Wanda is a market leader in one of the fastest growing, and for the foreseeable future, one of the most profitable cinema markets in the world. China has been growing at an average rate of 35 percent annually, and with 200 million more people forecast to join its upper-middle and affluent classes in the next five years, it will continue to grow rapidly. Ticket prices in China are high, labor and operating costs are low. Government regulations protect exhibitor margins, and keep foreign players out.
The U.S., on the other hand is a completely saturated, highly competitive, slow- to no-growth market, with average profit margins in the low single digits. The future upside for AMC is marginal, with few organic growth prospects and only a few interesting acquisition opportunities available. Given the ability to easily expand and perhaps dominate in a sizzling hot territory like China, why would Wanda invest at least $1.5 billion in the stagnant U.S. market?
3. AMC would not be strategic. One of Wanda’s stated justifications for the AMC acquisition is that it would guarantee the company U.S. exhibition for the movies that it produces.
This is just plain silly. First of all, while Wanda does have a film production division, it has yet to produce a single film. Secondly, unless they also plan on buying Lionsgate or Paramount, there is no way they’re going to be able to consistently make movies that anyone in America will pay to see. To pay $1.5 billion or more to have a U.S. outlet for a fledgling Chinese movie division makes about as much sense as it would to buy an entire parking lot just to be sure you’d have a place to park your horse and buggy.
Another presumptive rationale for the deal would be the potential gain in negotiating leverage Wanda would accrue from owning so many theaters. But the terms for acquisition, import and distribution of foreign films are already set by the Chinese government and they are highly favorable for domestic companies. Wanda wouldn’t gain anything here. It might gain a bit of leverage vis a vis equipment vendors, but as China’s largest player in a market that foreigners are eager to serve, Wanda already has a substantial negotiating position. Again, this looks like a specious justification for acquiring AMC.
4. The deal would be complicated. AMC is privately held, with four large private equity players—Apollo, Bain Capital, Carlyle Group and JPMorgan—among its largest shareholders. Getting these diverse investors to work in concert and agree on terms will likely be a long and complicated process, unless Wanda consents to significantly overpay for the acquisition.
5. The deal could get political. With Wanda’s billionaire Chairman Wang Jianlin already in the media spotlight due to his close dealings with disgraced politician and Politburo member Bo Xilai, a major investment in America’s cultural industry could bring Wang additional unwanted press scrutiny, and possibly attention from the Securities and Exchange Commission as well. Although there are no legal prohibitions against foreign ownership of a theater chain, American lawmakers and moviegoers might not be happy to see a Chinese company establish a dominant position in such a symbolically important business as the movie industry.
With no apparent strategic upside and so much potential financial and political downside, it’s hard to see why Wanda would want to pursue this acquisition. The deal would make infinitely more sense if it were going the other way, with AMC buying Wanda. But given AMC’s already heavy debt load and an imposing set of Chinese regulatory hurdles, that’s not likely to happen any time soon.
Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at firstname.lastname@example.org and at www.pacificbridgepics.com.