Why Amazon’s Rumored Buyout of AMC Entertainment Makes Sense

But it’s also likely that the target company won’t let go of AMC stock so cheaply

Even before the novel coronavirus upended the broader consumer retail market, movie theater giant AMC Entertainment (NYSE:AMC) was already a deeply troubled company. Laden with debt, AMC stock had to contend with a changing tide in its core business. With the rise of streaming firms like Netflix (NASDAQ:NFLX), many viewers preferred in-home entertainment. Still, contrarians – such as yours truly – believed that the box office provided a social experience that streaming providers couldn’t replicate.

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And that’s exactly what has made this pandemic so painful. Of course, almost every business has been hurt due to a severe reduction in demand for discretionary purchases. However, the coronavirus struck at the very core of the movie theater business. Let’s face it – a blockbuster film like “Star Wars” simply isn’t the same without a big screen and camaraderie among an army of dedicated fans.

But with social distancing become part and parcel of our new normal, consumers now find the cinema’s physical experience to be a liability. Not surprisingly, AMC stock cratered as the initial unmitigated spread of the disease forced all major U.S. cineplexes to close. Sadly, some locations have done so permanently, sending a shiver down the industry’s spine.

With so much turmoil and uncertainty, the latest rumor that Amazon (NASDAQ:AMZN) was interested in buying out AMC stock was welcome news to shareholders. Just the idea of such an acquisition was enough to send shares closing up nearly 30% on Monday.

Better yet, the deal makes sense for Amazon. Further, its history of disrupting everything makes this rumor more credible. But the biggest hurdle is AMC’s management team and major stakeholders. This isn’t the circumstance they were hoping for.

Buying Out AMC Stock Is a Tantalizing but Frustrating Prospect

On surface level, Amazon’s interest toward the cineplex business represents a logical expansion of its long-term business strategy. As you know, AMZN has long ago abandoned the idea that they will remain exclusively an e-commerce firm. It’s not enough for them to redefine how we shop and how we work.

Increasingly, they’re focused on reshaping how we think. To that end, control of AMC stock will go a long way.

Similar to other big companies, Amazon has shifted some of its vast resources into developing original content. Owning AMC would allow Amazon to showcase its movies for major releases. As Variety’s Brent Lang explained:

Last year, the company started moving away from a traditional theatrical release strategy of screening films in cinemas exclusively for 90 days before debuting them on its streaming service, Amazon Prime. That limited the number of venues that were willing to show movies such as “The Report” and “The Aeronauts.”  In the past, Amazon has explored buying a theater chain such as the Landmark, which ultimately was sold to billionaire Charles S. Cohen.

With AMC stock trading near all-time lows since its initial public offering in December 2013, now is a great time for Amazon to buy in. Of course, it takes two to tango, which is where the challenge ultimately lies.

I find it difficult that AMC’s decision makers would agree to a buyout at this juncture. Admittedly, the company is not in a strong negotiating position. Certainly, the implications of the coronavirus hasn’t done management any favors.

But it’s fair to point out that we may be at a bottom. As most states have either partially reopened or are planning to do so, AMC may be better served holding out for a better deal.

The Tricky Nature of Our New Normal

Nevertheless, if AMC chooses to decline the offer – assuming of course that a legitimate offer exists – it will do so under pressure. America is split regarding the reopening of its societies and economies, with many fearful of contracting Covid-19.

Further, the specter of a second wave of the coronavirus is both a health and fiscal concern. Plus, if such an event were to happen, it will almost surely kill AMC stock.

On the other hand, the concept of pent-up demand is a pertinent one for movie theaters. When Disney (NYSE:DIS) made the call to reopen Shanghai Disneyland, tickets sold out quickly and for an entire week. Yes, capacity was limited to 30%, but the surge in interest – especially in a high-contact environment – was encouraging.

When you consider that there are so many compelling films that moviegoers were denied, it’s possible that AMC shares will move higher from here. I’m certain that management is considering this possibility in their decision-making process.

Ultimately, I believe they will stand their ground. And that might augur well for AMC stock longer term. Still, this is not a situation for risk-averse investors to gamble on.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he owns shares of AMC.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/why-amazons-rumored-buyout-of-amc-entertainment-makes-sense/.

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