Rumors are swirling that Amazon (NASDAQ:AMZN) wants to buy AMC Entertainment (NYSE:AMC). AMC stock jumped as high as 56% Monday morning on the news. Although shares cooled off, they still managed to close up nearly 30%.
While there’s no question AMC could use a lifeline, it’s hard to know whether the unidentified sources quoted by the Daily Mail have any validity as Deadline, an entertainment industry news outlet, reports there are no talks between the two companies.
By the time I get this article written, edited, and published, it’s possible the whole thing could have blown over. In the meantime, if you own Amazon shares, is buying AMC a good business move?
I’m not so convinced. Here’s why.
Is the Theater the Best Way for Amazon to Gain Inroads into Homes?
In March 2018, I wrote an article about how Amazon’s acquisition of Ring, the company that made the doorbell camera mainstream, was intended to capture additional market share of your home. The idea was that Jeff Bezos wanted to sell you everything he possibly could to make your home reliant on Amazon.
Now, with these AMC rumblings, it could be that not only does Bezos want to own your home, he also might want to own your lifestyle, too. But would it be worth it?
Sure, AMC’s market capitalization at the moment is less than $600 million. The problem is that it had more than $10 billion in financial obligations at the end of the fourth quarter (December 31, 2019), including $5.5 billion in current and future operating lease liabilities as well as $4.8 billion in short- and long-term debt. By comparison, Amazon had total debt of $63.7 billion at the end of its first quarter.
The big difference: Amazon’s debt was against $296 billion in trailing 12-month revenue. In the last 12 months, AMC’s revenues were $5.5 billion, less than Amazon’s operating profit.
Amazon has explored buying a movie theater chain in the past to gain a screening venue outside Prime Video for some of its own productions. It pursued Landmark Cinemas before Mark Cuban and Todd Wagner sold them to New York Real Estate billionaire Charles Cohen in December 2018.
At the time of the sale, Landmark had approximately 52 theaters and 252 screens in 27 cities. At the end of 2019, AMC had 11,041 screens in the U.S., Europe, and Saudi Arabia. Landmark would have achieved the same end-goal at a much cheaper price.
At the end of the day, while the theaters would give Amazon a captive audience for selling all things Amazon, given the fragile nature of AMC’s business, couldn’t Jeff Bezos already do that through advertising partnerships with AMC?
AMC Stock Has Been Hammered
B. Riley FBR analyst Eric Wold is skeptical that AMC insiders would be interested in selling at a price that is less than one-third its December 2013 IPO price of $18.
“We would be surprised if an acquisition down near all-time lows by Amazon in a transaction that would more than likely be for cash (and not stock) would appeal to AMC’s major shareholders,” Wold wrote.
Dalian Wanda, the Chinese conglomerate controlled by billionaire Wang Jianlin, bought AMC in 2012 for $2.6 billion. Dalian Wanda subsidiary Wanda America Entertainment owns 100% of its Class B shares, which represent 155.4 million, or 75% of the 207.9 million in total votes. Its economic interest is just less than 50%.
Of the $2.6 billion Dalian Wanda paid for AMC in 2012, $1.9 billion was assumed debt. Over eight years, the Chinese conglomerate has made very little on its equity investment.
“This acquisition will help make Wanda a truly global cinema owner, with theaters and technology that enhance the movie-going experience for audiences in the world’s two largest movie markets,” Wang Jianlin said at the time of the deal’s announcement in May 2012.
The Bottom Line
In the scheme of things, Amazon paying $11 billion for a strategic asset isn’t a big deal against its balance sheet. However, between Dalian wanting to save a little face on any sale and Amazon needing to show a little restraint during the novel coronavirus pandemic, I don’t see this coming to fruition.
AMC currently has an Altman Z-Score of 0.29, which means the company could file for bankruptcy within the next 24 months. On the other hand, Dalian Wanda says the speculation it could go bankrupt is nothing but rumors.
If you own AMC stock and bought in double digits, I feel your pain. However, I would be very surprised if Amazon came to AMC’s rescue. We should find out soon enough.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
