Regal Cinemas: Movie Theater King for Sale

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“I say it here, it comes out there.” So goes the famous line from the Oscar-nominated film Broadcast News.

rgc-stock-regal-cinemas-earnings

What I said here, to my editors: “Someone is going to buy out Regal Cinemas (RGC).”

What came out there, in the news: During Regal Cinemas’ earnings announcement, the company informed investors it is seeking a buyer for its 7,000-screen empire.

Mega-investor Philip Anschutz owns more than 77% of the voting shares of the 574-theater RGC chain, which is the largest operator in the U.S. Just behind RGC is AMC Entertainment Holdings (AMC), owned by Chinese company Wanda Group.

Movie exhibitors like RGC are a pretty good cash flow business, assuming they are run properly and not over-leveraged. The business model is simple: Use debt and equity to build lots of theaters. Hope the movie studios produce enough decent product to get people to buy RGC’s overpriced tickets, which increase at greater than the rate of inflation each year.

Once there, RGC hopes they buy tons of concessions, which is where the real margins are — concessions yield almost 8 times in revenue what they cost, whereas box-office is about double. RGC hopes its cash flow exceeds debt service to the point where RGC pays a healthy dividend.

So far, it has done pretty well.

The downside is that RGC stock relies on the studios producing good product, but the increasing competition from home theater and the internet is cutting into revenues. In Q3, RGC’s revenues fell from $813 million to $694 million. Net income cratered to $27 million from $75 million. Diluted earnings fell to 17 cents per share vs. 48 cents per share last year.

As it turns out, the box office just isn’t what it used to be: Admission revenue fell 16% year-over-year.

The all-important cash flow number was $122 million vs. $177 million last year. RGC stock has $244 million of cash on hand and $2.4 billion in debt. Debt service averages about 5%.

RGC stock has been very generous with its shareholders (which is not unexpected, since Anschutz owns 47% of the stock). It’s paying 88 cents per share annually, which translates to a dividend yield of 4.2%. RGC stock also issued a special dividend of $1 per share. Traditionally, RGC pays out about 50% of its FCF in dividends.

Why RGC Is Selling Out

So, why is RGC looking to sell itself? For starters, movie theaters are not growth businesses — they’re cyclical businesses in which the cycle is totally unpredictable. I’m not talking about the economy — I’m talking about Hollywood’s random track record of box-office success.

If Anschutz is paying attention, and I’m sure he is, the Hollywood product is not terribly great. There are hits and misses, but consistent, great content production continues to elude the majors, and home entertainment is only getting better. TV is in another golden age, right when Netflix (NFLX) is producing it’s own content, as is Amazon (AMZN).

Private equity loves to purchase cash flow businesses. If they can get it at a good price, they come in and slice off expenses, and boost cash flow.

For now, RGC seems like a good place to park some cash and make some dividends, while waiting for the inevitable buyout that will come with a modest premium. By the way, AMC isn’t a bad choice, either. It has a good balance sheet and just announced an 80 cent annual dividend, or 3.3% yield. Cinemark Holdings (CNK) is also cash-rich, generated good cash flow, and pays 2.9%.

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As of this writing, Lawrence Meyers was long AMZN. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/rgc-stock/.

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