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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 Coming Soon: the World’s First 10,000 Screen Circuit?

A lesser-known Dodona Research publication is a compilation of circuit screen counts across around 60 territories, laid out as a grid. So circuit A has x screens in territory D, y screens in territory J, and z screens in total. It’s a survivor from the rush into international markets of a decade ago. With exhibitors having spent the last few years tidying up sub-scale foreign investments, nowadays our Cinema Exhibitors Database mostly serves as a prospects list for equipment manufacturers.

But it’s not without interest in its original role of measuring market concentration. For example, the three circuits which dominate the US market – Regal, AMC and Cinemark – are vastly larger than their nearest competitors with more than 17,000 screens between them. Fourth-placed Organizacion Ramirez Cinemas, based in Mexico, has 2,337.

Despite their size, however, they are less dominant within their home market than other exhibitors elsewhere. Not just small markets like Finland or Sweden but even the UK which, measured by box office, is currently the fifth largest theatrical market in the world after the United States, Japan, India (if you believe the figures), and France.

After a round of consolidation, the UK’s top three circuits now account for more than 60% of the country’s screens compared to the 40% of US screens owned by Regal, AMC and Cinemark. Both countries show a long term trend towards greater concentration, as the graph below illustrates.

Top 3 Circuits: % Share of Screens

Today Regal has 6,777 screens in the United States. In the UK it took 15 years for the share of the top 3 circuits to go from 40%, where the US is today, to 60%-plus. If the US follows suit, the odds are that its leading circuit will operate over 10,000 screens. If, as seems possible, digital technology makes running big circuits easier and more profitable, this milestone could come even sooner.

postheadericon Cineworld’s Spanish Venture: Buy When There’s Blood In The Streets?

On 7th April Cineworld announced it had agreed to acquire 10o% of the share capital of Cinesur Circuito Sánchez-Ramade, S.L. Gross assets of €18.6 million, comprising 11 multiplexes with a total of 136 screens, were to be acquired, though the value of the transaction was not disclosed.

To add a little detail to the company’s brief press release, in fact only a part of the Cinesur circuit is being acquired. Four cinemas: Plaza Eboli in Madrid, the Alkazar in Cordoba, Cervantes in Jaen, and Cinesur Larios in Malaga did not form part of the package. The last two-named have already closed. The sale itself is reported in Spain to be part of a cash-raising exercise designed to rescue the larger Sanchez Ramade group, whose property development subsidiary Noriega has already filed for bankruptcy. The Spanish press is less useful on the question of price, though one report cited a source suggesting the transaction was in the range of €30 to €50 million, rather than the €60 million at which the circuit had been offered in Summer 2010.

This is an interesting figure. EBITDA of the acquired company was €2.3 million in 2009, a figure which is unlikely to have increased in 2010 when Spanish admissions fell around 12%. So either the four cinemas not acquired were making losses at the EBITDA level or Cineworld has paid a very full price – if one believes €30 million suggested in the press.

Concerning the wider logic of the deal, there are two key aspects. The first is the condition of the Spanish market itself: Spanish cinema admissions declined from 435 million a year in 1965 to 93 million by 1991, a pattern familiar from many other European countries. By 2001 the market had recovered to 147 million admissions, again not untypical. The decline since then to just 97 million last year, 2010, has rather fewer parallels. With a piracy problem of long-standing and, now, huge youth unemployment, the big positive about this cinema market is that it probably cannot get much worse.

The second aspect is that, as Cineworld has hinted, Spain looks a suitable candidate for a consolidation strategy. There are many survivors from among the regional circuits that used to dominate the industry and, in the way of things, some are run better than others. Cineworld can buy some of these circuits, close head offices, lose under-performing cinemas and, in some cases, apply improved management. We have every belief that management is capable of executing such a strategy successfully, only assuming the company avoids overpaying for acquisitions.

Cinesur Circuito Sánchez-Ramade, S.L.

postheadericon Is Cinema Recession Proof?

After the financial blow-up the question of whether cinema was recession proof quickly became a topical one on the telephone lines in our office. It is tempting to say the answer is yes, and leave it at that. After all, cinema endured the great depression of the thirties and, in normal times, it is impossible to find any evidence of economic cycles in cinema attendance (though the economic cycle does have a big bearing on investment in new sites).

In the last couple of weeks the question, for me at least, raised its head again. The reason for this is that I was finishing a new report, Cinemagoing Southern Europe 2010, wondering whether the forecasts in it were really sustainable in the face of the crisis in Ireland and, more pertinently, the forces marshalling to attack Portugal, Spain and Italy, in what looks likely to be a real life manifestation of the domino theory.

As it happens, the decision was made to let the forecasts stand, mostly on the grounds that this was the last of our European reports this year, and it seemed desirable that it should be written against the same background assumptions as the others. Even so, the forecasts in this particular report are not very optimistic. They look forward to a lengthy period in which exhibitors will be fortunate to do more than grind out flat admissions, and the best way to lift profits is likely to be a continued process of consolidation or, in plain English, buying up other cinemas.

But it may be right to question the conventional thinking on the relationship between the economy and cinema. Most of the time, cinema ignores the economy. The Argentinian default of 2001, for example, left the cinema business virtually untouched (though not exporters of films to Argentina, who found themselves being paid in devalued pesos). On the other hand, Latvia’s austerity measures hit its cinema market hard: 2009 admissions were down over 17%, and a doubled rate of value added tax on tickets took a further chunk out of industry revenues.

In the short run forecasting the cinema business is still all about product, most noticeably demonstrated over the last year by Avatar, but also by a whole raft of animated pictures like Ice Age: Dawn of the Dinosaurs and  Toy Story 3 and, as I write, by the latest episode of another long-running franchise, Harry Potter and the Deathly Hallows: Part 1. While this flow of product continues – and there are numerous instalments of a number of heavy-hitting franchises in the works – the proposition that cinema is recession proof is probably not going to be seriously tested in any but marginal, poorly established markets. But with some Western European consumers about to be hit hard as governments wrestle with the ongoing debt crisis, a few months without a good picture may well produce a scare.

postheadericon India Forecasts Downgraded

Recent press surrounding the release of PricewaterhouseCoopers new Indian Entertainment and Media Outlook 2010 put a positive spin on the report numbers, citing the 12.4% compound growth forecast for the filmed entertainment industry which, if fulfilled, will take revenues to 170.5 billion rupees by 2014.

 Compared to a year ago, though, PricewaterhouseCoopers is somewhat less optimistic. A stand-off over terms between producers and exhibitors saw a three month hole punched in the country’s 2009 release schedule, and box office drop 14% to 70 billion rupees from 81.3 billion in 2008. Although this could be argued to be a one-off event with limited implications for future growth, PricewaterhouseCoopers has taken the opportunity to downgrade its previous forecasts.

 In 2009 the company was forecasting total film industry revenues for 2013 of 184.3 billion rupees, a figure now cut to 157 billion. Looking at domestic box office alone, the new forecast of 116 billion rupees in 2013 compares with a year-ago forecast of 132.3 billion.

 With India’s inflation rate running at around 10%, PricewaterhouseCoopers’ new forecasts suggest fairly modest growth in real terms. This seems an adjustment in the right direction. India’s film business has been over-hyped recently. Its exhibition sector is huge and well-established, serving between two and three billion patrons each year and appears in many respects a mature market. Clearly there is scope for modernisation and a gradual growth in revenues from higher ticket prices, but India is not starting from the low base which has been a characteristic of other fast-growing cinema markets.

 You can download the full PricewaterhouseCoopers report using the link below.

 http://www.pwc.com/en_IN/in/assets/pdfs/Publications-2010/E_M_Report_2010.pdf