Evolving technologies and consumer habits are changing the movie theater business amid the coronavirus pandemic, potentially giving new players a rare chance to enter the business through opportunistic M&A.
Recent reports indicate that AMC Entertainment Holdings Inc. — beleaguered with a leveraged balance sheet and the prospect of ongoing theater closures due to the outbreak — was approached by Amazon.com Inc. to discuss a potential deal. While analysts believe such a major acquisition would be unlikely given the risk for Amazon and the lack of reward for AMC shareholders, the prospect comes at a time when the movie theater industry is ripe for disruption. While other film and video outlets have moved to increasingly digital and interactive models, the theater business has been relying on ticket-price hikes and concession sales to drive revenues amid declining admissions.
Justin Begnaud, independent film producer and managing partner at film finance and management company Kirin Media, said Amazon could leverage its experience in digital retail and streaming to innovate the film and event space.
"Amazon is a digital retailer, and they're the best at doing so," Begnaud said in an interview.
Tom Forte, an analyst with D.A. Davidson, said Amazon could certainly be looking to provide a "tech-heavy" experience in the theater space to further showcase its own content and sell movie tickets through its Prime membership program.
Amazon in 2018 was reportedly considering the exhibition space as it and fellow streamer Netflix Inc. circled independent chain Landmark Theatres. The theater chain was ultimately sold to Cohen Media Group LLC, but both Netflix and Amazon have continued ramping up their film studios and getting theatrical distribution for their features has continued to be a pain point. Historically, the Academy of Motion Picture Arts and Sciences has required a studio release a film in theaters for a certain number of days and showings in order to be eligible for Academy Awards, leaving the two streamers with incentive to enter the business themselves.
However, Amazon would need a cut-rate deal if it were going to take on an entire theater chain like AMC, Forte at D.A. Davidson said.
"I have a hard time believing that they would be considering this unless they thought that the price tag was dirt-cheap," the analyst said in an interview. "It would have to be gift-wrapped and fall in their lap."
That could be the case. Exhibitors are trading at discounted multiples, especially after the coronavirus sell-off. AMC's revenue has ground to a halt amid the theater closures, and the company is straining under a heavy debt load. With AMC scrambling to shore up capital, an acquirer could see an opportunity to seize the theater chain at a discount.
Amazon had $1.20 trillion in market capital, as of late-day trading May 12, whereas AMC had a market cap at $561.9 million at the same time.
Begnaud sees any deal between Amazon and AMC potentially paving the path for further M&A in the exhibitor space.
"If Amazon buys AMC, then only [The Walt Disney Co.] will be able to compete in the exhibition space by purchasing Regal or Cinemark [Holdings Inc.]," he said. Regal is currently owned by U.K.-based Cineworld Group PLC.
One thing that has historically constrained M&A in the theater space is the longstanding Paramount Consent Decrees from the U.S. Department of Justice. Signed more than 70 years ago, the consent decrees blocked major movie studios at the time from owning theater chains. In recent years, the DOJ has signaled its interest in lifting these restrictions.
Jeff Bock, senior analyst at Exhibitor Relations, said he believes the DOJ will likely lift the consent decrees to enable theaters to adapt to changing market dynamics. It is not as much an issue of antitrust regulation anymore but an issue of solvency for theater owners.
"[The] business might not be capable of surviving without deep-pocket support," he said in an interview. A buyer like Amazon could help AMC survive the pandemic-related downturn and potentially thrive amid changing consumer dynamics, Bock said.