Hollywood and its trade association, the Motion Picture Association of America, has done its best to fool the world into thinking the motion picture business is in fine shape. It is, but only if you happen to be The Walt Disney Company (NYSE:DIS). Otherwise, attendance has been dropping significantly. Although it varies by year, the overall trend is bad — and that’s not good news news movie theaters, like Regal Entertainment Group (NYSE:RGC) and RGC stock.
Bad Movies Equals Bad Box Office Results
In 1995, there were an estimated 1.22 billion movie tickets sold, reaching a high of 1.576 billion in 2002. So far this year, only 1.08 billion tickets have been sold. Yet, you have to dig through the MPAA’s annual report (page 11) to find a chart that shows this. Everything else is about how great box office results have been!
Sure, that may be if you account for the fact that the average ticket price of $4.35 in 1995 is now more than 100% higher, at $8.90. (By the way, I don’t know anyone paying that price for a movie. Out here in Los Angeles, it’s no cheaper than $12.)
The reason is that Hollywood films are generally getting worse and worse. The values portrayed have alienated more than half of America and, with bad content, comes poor box office results.
Hence, inflation-adjusted box office numbers peaked fifteen years ago at $14 billion, and will only break $10 billion this year because of Thor: Ragnarok and The Last Jedi. That equates to a 27% decline over those fifteen years.
Movie Theaters Feeling the Pinch
So, it stands to reason that exhibitors, i.e. movie theaters, might be feeling the pinch. They have been, although it has been blunted by increases in concession prices. If you look at RGC, its 10-K shows that from fiscal year 2014 to FY2016, admissions revenue grew 3%, while revenue from concessions grew 13%. AMC Entertainment Holdings, Inc. (NYSE:AMC) had more robust results: admission revenues increased 16% over that same period while concessions grew 28%.
Yet, AMC was acquired by Dalian Wanda Group, a Chinese firm, in 2012. This had more to do with the Chinese scrambling to get money out of the country than the state of the business. However, we also recently saw AMC purchase Carmike Cinemas, and the British Odeon chain.
Now comes Cineworld Group plc’s offer to buy RGC stock. Why all the M&A?
Bottom Line on RGC Stock
Exhibition is a mature business and the best businesses have cash flowing nicely. Movie theaters are a simple business. Draw down debt to build the theaters, earn money from admissions and concessions, pay down debt and, once there is cash flow, pay a dividend. Because admissions are falling and there will not be any material change in content, theater chains have realized they are better off merging now before business gets worse.
That way, synergies, cost-cutting measures and overlaps can be handled now, while things are good, and the chains can run optimally.
This is why you can kiss RGC stock’s very attractive 5.3% dividend goodbye. Cineworld will close this transaction and, while Cineworld stock currently trades on the London exchange, the “new” company will probably not. Plus, Cineworld needs the $200 million in cash flow from RGC.
So, in this case, M&A activity is certainly not going to benefit shareholders, other than those who bought in at a lower price and will enjoy the buyout premium.
This is a shame, because RGC stock has been relatively range-bound for many years, and the dividend was reliable and generous. The payout ratio was about 70%, so it likely would have been sustainable.
Like robust box office revenues, that now appears to be a thing of the past.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
