Description
We are updating our analysis on AMC in view of 1) the announced acquisition of Cinemark by Madison Dearborn for $1.560Bn enterprise value or 7.8x EBITDA 2) AMC’s issuance of $300MM in 8% coupon notes with which it called $275MM in 9.5% notes 3) AMC’s closing on a $175MM revolver which refinanced the old $425MM facility and 4) the announcement that a deal between Loews and AMC is off and that Loews is officially on the block.
1) Applying Cinemark’s acquisition multiple to AMC yields a price of $18. AMC currently trades at $15 or 6.8x on a fully diluted basis. There is no reason to believe that AMC has a lower quality of theatres than Cinemark. While we do not know for sure what Madison's intentions are as to expansion and pricing, the competitive trend has been rational in the last 2 years. Judging also by Carmike's and Regal's modest capex plans, growth is in general limited to new shopping malls.
2) The refinancing, by our calculation, lowers AMC’s cost of capital by 50bp to 9.5% -- we were using 10% in the previous analysis. Our old WACC generated $14.91 under a no-growth perpetuity valuation model, our new WACC generates $15.98. Under a growth scenario of 5% and ROIC of 13%, we were deriving $19.50 per share at 10% WACC, we now generate $22.39
3) We have not gotten pricing on the new revolver but we suspect it is in the L+150 area vs L+250 on the old facility. While the revolver is unfunded, and hence the better pricing does not improve WACC, it does provide enormous flexibility for the company. One potential use for the massive amount of liquidity ($311MM of cash + $175MM of revolver) is the one-time payment of a stock dividend, a la Regal. No covenant would preclude the distribution of cash to the shareholders. Regal’s special dividend was 20% of stock price. A similar ratio would $3 special dividend per share for a total of $240MM of cash use.
4) We are relieved that AMC and Loews have broken talks - for now. A potential acquisition of that size added uncertainty to our valuation. A potential sale of Loews may actually confirm the high acquisition multiple paid for Cinemark and provide another solid valuation benchmark for AMC.
Net net we think the story has gotten better, with an upside on the stock around $19-20 and bottom of $12-13.
Catalyst
Cinemark acquisition by Madison Dearborn