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Like Groundhog Day, the movie business can seem remarkably resistant to change. In 2002, when Philip Anschutz floated Regal Entertainment Group, Spider-Man and Star Wars were two of the three biggest movie hits of the year. Fifteen years on, with Regal a likely seller to the UK’s Cineworld, the same superhero and spaceship series are still churned out.
The brutal reality is more like Requiem for a Dream. Headline box-office receipts might have changed little — US takings were $9.1bn in 2002 and stand at $9.7bn so far this year — but adjust for inflation and they are down a quarter. In volume terms, ticket sales peaked in 2002 at almost 1.6bn. They were 1.3bn last year and are at 1.1bn so far in 2017.
The secular decline is real, and the problem is not just rubbish superhero movies such as Justice League. Better, cheaper and shorter home entertainment options, such as Netflix, have changed the landscape.
Regal, share price down 20 per cent this year before Reuters reported the Cineworld talks, has adapted better than US rival AMC, down 60 per cent. Its signature initiative has been reclining seats, with a quarter of its cinemas getting them so far. People will apparently still leave their houses if they can lie down at the other end.
Yet Regal’s enterprise value is nine times earnings before interest, tax, depreciation and amortisation. The UK chain commands 10 times even after investors took fright at the prospect of a dilutive rights issue to fund the bid, and marked the shares down 15 per cent. Before that, it was 12 times. That kind of valuation gap is also why AMC plans to spin off its European business in an initial public offering in the next two years.
Given the environment, and despite carefully costed promises to boost takings via installing more recliners and selling more beer, Regal investors should be tempted to get out altogether via a Cineworld deal. The mooted $23 a share cash offer is a 40 per cent premium to the undisturbed share price, which had recently fallen to $16 — the same price as Regal’s 2002 IPO. Some things really are stuck in time.
The Lex team is interested in hearing more from readers. Is Cineworld wise to make a cash bid for a company twice its size in what looks like a declining market? Please tell us what you think in the comments section below