Yay to the first guest post on my blog! This post was written by Uche, @mynameisuche on twitter. He’s the most knowledgeable person I know on media businesses and I begged him to share his thoughts on here. He really came through with an insightful write up. Enjoy! – Eke.
When I decided to start investing earlier this year, @eldivyn (me y’all) was the first person I reached out to, and he gave me advice I would often see repeated in all the books and articles I read later on; invest in what you know. The idea was to pick companies (and sectors) you were familiar with, because then you understood how their business worked, and you could make better judgments on whether or not to invest in them. So when I downloaded RobinHood, the first ticker I searched for was AMC. Seeing as I’m a movie buff who loves film & TV so much I have a whole site dedicated to discussing it, it felt like a no-brainer.
AMC Entertainment (no relation to AMC Networks, the TV channel famous for shows like The Walking Dead, Preacher, and Breaking Bad) is a cinema chain, that is currently ranked #2 in the United States (if we’re judging by the number of screens), only below Regal. I’ll admit, I’m partial to AMC because when I first moved to the U.S., the only cinema in the city I lived in was an AMC, and I spent too much time there to not fall in love with it. I’ve been to quite a few others since, but it remains my favorite. Now I currently live in a small city and the only cinema there is a badly run Carmike, and it kills me that I have to go there damn near every week. So when I heard about this deal a few weeks ago, I was excited.
This morning, I woke up to the news that there’s been big progress in the Carmike acquisition. AMC had previously offered $30 a share, and even though Carmike’s board was in favor of the offer, a lot of their (big) shareholders revolted. It looks like over the weekend, AMC submitted an improved $33 a share offer, and pretty much said “take it or leave it.”
Everything that could be said in favor of the Carmike acquisition can all be summed up in one sentence: Bigger cinema chain = More money. More revenue, greater market share AND market cap, more leverage negotiating movie screening rights, more cost savings due to scale, etc. It just makes sense for them to merge. There’s no point in being #2 (or in Carmike’s case, #4) when you could just join forces and be #1. As big as AMC is, there are a lot of cities where it doesn’t have a presence in, mine included. This move fixes that. Secondly, AMC was not-so-recently bought by some Chinese investors, and as expected, they’re looking to expand globally. While the Carmike deal dragged on, they went and bought Odeon & UCI, a British cinema chain. This means that they’ve been granted access to markets in the UK, Germany, and Spain. All fits in nicely. Thirdly, seeing as we live in the age of superhero films, an age where movies grossing over 1 billion at the box office isn’t a rare occurrence anymore, a scenario where AMC owns 1 in 5 theaters in the USA is great news for its stakeholders. This is of course assuming that the deal goes through & it is ratified by all the necessary regulators. (One more reason: AMC being the ‘relatively’ higher priced chain competing on facility quality and having relatively thin margins will be helped greatly by Carmike’s low price, higher volume business with their fatter margins. Kinda like the Apple/Android situation).
However, there’s a catch. There are a lot of companies who stubbornly went one way while the world was going another. Yes, I’m talking to you Blockbuster (Hi, Netflix), Yahoo (weird focus on media + fumble of search = Hello, Google), Research in Motion & Nokia (thank you, Steve Jobs), and to a degree, Microsoft. The caveat as far as AMC is concerned is that we might be living in a world where people going to the cinemas will soon become a thing of the past. There are already rumblings, such as The Screening Room, which is the brainchild of Sean Parker (who else?) that proposes a system whereby the average, everyday user like you & me could pay $200 to get a device, then pay $50 for each new theatrical release, so we could watch it right from the comfort of our living rooms. In this hypothetical world, when The Fast & Furious 32 is released (because obviously they won’t stop making the damn things), we wouldn’t need to drive to the cinema to see it. Naturally, this is facing severe resistance from the big cinema chains and a lot of film directors, but more worrying is the fact that A. there are also big directors like Spielberg and J.J. Adams in support of it, and B. The studios will go where they money goes. If this kicks on & becomes the new thing, they’ll support it, and there may very well come a time when actual cinemas go the way of drive-in cinemas. It might be the disruptor the industry needs, but I hope not.
PS: IMAX’s balance sheet will also be desperately praying this works out. Atom will too.
(Uche’s post, and a few discussions we’ve had recently have sparked my interest in the media/movie business, one area I know awfully little about but which I hope to fix soon. But just so you don’t assume movies are all the business he knows, I’m going to try to get him to discuss graphic chips, gaming computers and a good ole company known as AMD. He won’t want to, but he will lol.)