Powered by WP Bannerize

Archive for the ‘Circuits’ Category

postheadericon So CinemaxX Was the Cheapest Exhibition Stock in Europe

Readers of Black Dove may have been reminded of our headline last November (Is CinemaxX the Cheapest Exhibition Stock in Europe?) this week as Vue paid €6.45 a share for the company, subject to the usual regulatory approvals. In fact the offer by Vue was not particularly generous, equating to an enterprise value of almost exactly six times historic EBITDA, at the lower end of current stock market valuations for exhibition stocks. Nevertheless it compares favourably with the €3.30 at which CinemaxX shares were languishing when we wrote about them.

Having reviewed the rather complicated way we have been doing things, I am sorry to say that, at least for now, this is the end of the road for Black Dove. Instead of maintaining a separate blog we will be publishing an occasional newsletter directly from the Dodona Research web site; you can subscribe to it here. The first issue has more on the Vue acquisition. We are also bringing a more methodical approach to bear on our monitoring of publicly-quoted exhibition companies, with the first step being a spreadsheet comparing valuations, also available on our web site. Both are free.

postheadericon AMC Goes for $2.6 billion; What Price the Others?

The recent sale of AMC Entertainment to China’s Dalian Wanda Group, coming in the closing stages of our research for the latest edition of Moviegoing, caused us some slight inconvenience and inspired modest admiration at the price obtained, widely reported as $2.6 billion. If correct, this works out at 8.4 times the circuit’s historic EBITDA.

This figure is somewhat higher than the current stock market valuations of the other large American circuits. Cinemark, at its recent share price of $23.25 is valued at an enterprise value of 8.1 times its 2011 EBITDA. This higher valuation than either Regal or Carmike is supported by the fact that its Latin American circuit is still growing. The company also pays a quarterly dividend of $0.21 per share.

Coincidentally, Regal also pays a $0.21 quarterly dividend, though its lower share price, $13.93 at the time of writing, means its shares yield an impressive 6.0% compared to the 3.6% offered by Cinemark. With its operations confined to the lacklustre domestic exhibition sector, however, Regal shares are rated lower than Cinemark. Its enterprise value of $3.9 billion equates to 7.7 times its $505.5 million of EBITDA in 2011.

Carmike is valued lowest of all. Quite highly geared – debt accounts for nearly two-thirds of its enterprise value – at the current share price of $14.00 the company sells for 6.6 times EBITDA.

Our share tip? We don’t really have one, relative to each other, at least, these valuations look about right. And with the ongoing crisis in the Eurozone, there are cheaper stocks in Europe, notably CinemaxX in Germany and Kinepolis in Belgium – though to invest in the latter you  probably need to be confident that Spain, where Kinepolis has invested heavily, will stay in the Eurozone.

postheadericon Is the German Cinema Market Coming Good At Last? And Is CinemaxX the Cheapest Exhibition Stock in Europe?

Since reunification Germany’s cinema market has had a floor of around 125 million admissions a year. Given that last year’s 126.6 million admissions barely crept above this level – and those for the first half of 2011 are reported to be just 2.2% higher than the corresponding period in 2010 – it might seem odd to see anything very positive going on in this market.

In fact there is. Germany’s screen count is falling, slowly and steadily. The last five years have seen 4% of screens go, and this holds out the promise of at least an improvement in profitability. As noted in our recent Cinemagoing North West Europe report: “ The key to this almost certainly lies in getting the balance between the numbers of cinemas and the audience right – that is, in eliminating the over-screening that is such a bugbear in this market. This would allow the best operators to embark on much-needed consolidation strategies and spread improvements in marketing and operating strategies across the industry, and perhaps finally find the answer to the question of why Germans do not go to the cinema.”

Taking even a little bit of excess capacity out of the market can have a marked impact on profits. Cinemaxx, the second-largest circuit, saw its pre-tax profits climb to €17.6 million in 2010, from a loss of €4.4 million only two years before, despite higher industry-wide admissions in the earlier year.

Indeed, CinemaxX is starting to look as though it might be a good investment. At it’s share price of €3.30, almost three times the level of two years ago, the company’s Enterprise Value, including net debt of €73 million, comes out at €160 million, just 4.25 times its EBITDA of €37.5 million, while diluted earnings per share of €1.05 give a historic P/E of 3.15. Following further progress in the first half of 2011, CinemaxX stock seems relatively inexpensive despite the absence of a dividend.

Compare Belgium’s Kinepolis Group: at around €54, the shares trade on a multiple of EBITDA to Enterprise Value of about 6.8 times, though as previously noted in this blog, land and buildings valued at €197 million owned by the company form a significant proportion of its enterprise value of €434 million. Excluding these assets the company’s EV/EBITDA multiple falls to around 3.7 times, although executing the series of transactions (sale and leaseback of the property, return of cash to shareholders) needed to realise this hidden value would not yield such a precise result, nor is it likely to happen under the current management, whose strategy is explicitly based on owning the properties from which it trades.

Kinepolis arguably offers slightly better value, though not the continuing recovery prospects of CinemaxX. Britain’s Cineworld, a pure cinema operating company which owns no property, on an EV/EBITDA multiple of 6.3 times at a share price of £1.90 looks unequivocally more expensive. The dividend yield of over 5% offered by the company may be a factor. But a lack of cross-border traffic in investment in these small cinema exhibitors also seems a candidate for explaining why valuations vary so widely. And of course the problems of the Euro may also be relevant.

postheadericon Italy and Spain Catching Up in Consolidation Stakes

The multiplex business is eminently scalable: refreshments, staff roles and training, not to mention film product, are all duplicated from site to site. Today’s ongoing migration to digital projection may increase this scalability with the promise of centralising some projection functions. There are substantial benefits to building large circuits with centralised offices and enhanced buying power that can conduct large scale marketing campaigns.

Following on from my last post, Coming Soon: the World’s First 10,000 Screen Circuit?, it’s interesting to look at levels of concentration in the major Continental European markets in 2010.

Top 3 Circuits: % Share of Screens

It is notable that Italy and Spain lag Germany and France in terms of the share of screens operated by the top three circuits in each country. Which neatly contextualises the spate of recent consolidation activity in these territories: Cineworld’s purchase of Cinesur (Cineworld’s Spanish Venture: Buy When There’s Blood In The Streets?); Odeon UCI’s acquisition of UGC’s Spanish cinemas and two sites from Coliseo; its purchases of the UGC and Vis Pathe circuits in Italy and, most recently, 51 screens from Giometti in a deal due to close this month. It is Spain and Italy which have offered the greatest opportunity to buy choice assets which can be combined to form larger, more profitable circuits. By our calculations, it looks as though the top three Italian circuits will control a minimum of 20% of Italian screens by the end of 2011, the top three in Spain a quarter of all screens in Spain – nearly the current level in France and Germany.

postheadericon Valuation Anomalies: A Tale of Two Small European Countries

The recent sale of the Finnish exhibitor, Finnkino Oy, to the Swedish private equity firm Ratos AB, reminded me of a conversation with a UK exhibitor in the early 1990s. His company had looked at Finnkino, then also for sale, but they’d concluded that if the then current owners couldn’t make any money out of it, they probably couldn’t either.

Today Finnkino is a profitable, well-run company, with significant exhibition interests in the Baltic States alongside its dominant position in the Finnish market. But Finland is still a low attending country as far as cinema is concerned, with the relatively high operating costs typical of Northern Europe.

Ratos is hoping to improve profits by building new cinemas to drive attendance, and also presumably anticipating an economic recovery in the Baltic States. In 2010 Finnkino made EBITDA of €8.5 million from revenues of €88.6 million. Ratos, however, was persuaded to pay €94.3 million for the circuit. At 11 times EBITDA this is a demanding valuation: Ratos would need to get Finnkino’s EBITDA margin up to around 15% of revenue instead of 2010′s 10% just to match the recent Vue deal (see How To Value a Cinema Chain: Part 2). Although this is probably do-able, more progress will depend on getting significantly more Finns into cinemas. Given that attendance levels have been flat since the 1980s, this might prove tricky.

Contrast the situation of another small country exhibitor: Belgium’s Kinepolis, which is quoted on the Brussels bourse. Like Finnkino, Kinepolis dominates its home market and has interests in neighbouring countries, and it is regarded as among the best-run and most innovative exhibitors in Europe. At its current share price of €54, however, stock market investors value the company at an enterprise value of roughly €430 million, less than seven times its 2010 EBITDA of €65 million. This low valuation is all the more remarkable considering Kinepolis, unusually for a cinema circuit, owns its own land and buildings – to the tune of €197 million in its 2010 accounts.

So both valuations seem anomalous, one too high, the other too low, but with private equity’s aversion to hostile takeovers and stock market investors’ less optimistic view of exhibition, such anomalies may well persist.