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Expanded Purchase Recommendation: January 2018
The Turnaround Letter recommended this mid-cap value stock in January 2018:
AMC is the world's largest theater company, with over 1,000 movie theaters and 11,000 screens, including 179 IMAX locations, in 15 countries in North America and Europe. The company was started in 1920 when three brothers purchased the Regent Theater in Kansas City, Missouri. AMC has launched a number of industry innovations including the first multiplex theater, the first online ticket service and the first all-reclining seat theater. In the past two years, AMC made several major acquisitions, including Carmike Cinemas and Odeon/UCI Cinemas. In 2012, the company was acquired by China-based Dalian Wanda Group, followed by an initial public offering in 2013. Dalian Wanda currently holds a 58% equity interest and 81% of the voting power.
The company's shares are down 57% this year and trade 20% below the IPO price of 18. Investors are concerned about rising competition from streaming services like Netflix and Amazon Prime Video, as well as planned premium video-on-demand, which potentially would allow viewers to watch new movies in their homes soon after they are released in theaters.
After this past summer's attendance fell to one of the lowest levels in decades, investors are questioning whether the downturn is cyclical, or more reflective of secular trends. Creating further concern is whether AMC can successfully integrate its recent acquisitions which have led to a high debt level and tight cash flow. There is also some uncertainty about the intentions of Dalian Wanda.
AMC's outlook is much healthier than the market is giving it credit for. Despite the lackluster summer, the company's revenues, adjusted for the acquisitions, will likely be flat from a year ago. We think much of the recent box office weakness is due to the dull movie slate earlier in the year. Viewers still respond enthusiastically to great movies. For example, this past fall Stephen King's It became the #1 horror movie of all time, and Beauty and the Beast grossed
$1.3 billion. Premium video-on-demand talks appear to have stalled, but at $30-50 per movie it could end up being a positive for AMC if implemented. AMC's theater upgrade program, which includes installing luxury recliners and offering surprisingly good food, alcoholic beverages and other amenities, is showing very promising results. The company is developing other initiatives, including better pricing and selling movie merchandise.
Management is focusing its cash flow on repaying down much of its elevated debt by 2019 as well as on high-return upgrade projects and repurchasing $100 million of its shares. To raise additional cash, AMC has an asset sale program underway and may do a partial IPO of its European business next year. With no significant debt maturities until 2022, the company has considerable runway. At a low 7.2x estimated 2017 EBITDA and a generous 5.6% dividend, AMC's shares could provide strong returns to investors. We recommend the purchase of AMC Entertainment Holdings shares (AMC) up to 25.
This report accompanies and supplements the December 28, 2017 initiation of AMC Entertainment Holdings, Inc as a BUY in the January 2018 Edition (Volume 32, Number 7) of The Turnaround Letter. Material events subsequent to the initiation date are incorporated into this report. This report may also correct any inaccuracies in the initiation report. As of the publishing date of this report, January 15, 2018, we reiterate our Buy recommendation on AMC Entertainment Holdings, Inc. (NYSE: AMC) shares up to 25.
THE MARKET'S CURRENT VIEW
The company's shares are down 57% this year and trade 20% below the IPO price of 18. Investors are concerned about a range of issues, most of which would pressure AMC's revenues and eventually its cash flow for servicing its debt:
Weak theater attendance across the industry
In early 2017, the cinema industry's outlook was viewed as stable and healthy, with AMC and its peer stocks trading near their all-time highs (AMC closed at 35.50/share on November 17, 2016, just below March 2017 high). However, AMC pre-announced disappointing 2Q17 results on August 2, citing weaker box office sales in North America and less than expected benefits from strength in European ticket sales. Adding to investor frustrations were slumping industry sales in July, down 32% from a year ago. AMC shares fell 27% on August 2nd, with its peers' shares falling as well. The subsequent 49% year-over-year drop in industry revenues in August did not help investor sentiment.
Rising competition from streaming services
Streaming services like Netflix and Amazon Prime Video have grown rapidly, offering high-quality movies and TV series that can be watched anytime, anywhere, as often as desired, for a single low monthly price. In 2017, these two services had an estimated 100 million+ in combined U.S. subscribers, growing at perhaps a 20% rate. Additionally, Amazon Prime offers first-run movies within 4-8 weeks of their theatrical debut. Investors fear that viewers will abandon cinema-based viewing in favor of these newer services.
Potential arrival of Premium Video-on-Demand
This service ("PVOD") does not currently exist, but could start in the next few years. PVOD would make newly or recently released movies directly available to consumers on their devices (TV, computer, phone), removing a major incentive for consumers to go to the cinema.
Growth in MoviePass
The recent price cut to $9.95/month in the MoviePass service in August 2017 has been linked to the industry's weak box office results that month. MoviePass allows subscribers to see any movie in any theater for free. Investors fear that this service will erode average ticket prices.
In the past five years, AMC's theater count has more than doubled, to over 11,000 theaters. Expansion at this scale could create considerable integration difficulties – the Carmike acquisition has already run into some issues, and the acquisition of over 2,700 Europe-based theaters brings additional unknowns.
High debt level and tight cash flow
AMC carries $4.4 billion in debt, much of it produced from its rapid acquisition pace. This debt is 5.2x its operating cash earnings (as measured by EBITDA), a high degree of leverage even for a relatively stable business like movie theaters. Annual interest expense of about $285 million is nearly 34% of EBITDA, indicating that any meaningful reduction in earnings or increase in interest costs could pressure their ability to stay current on the debt.
Dalian Wanda's intentions
Currently 58% of AMC's common stock, and 81% of the voting rights, are held by Dalian Wanda Group, a large multi-national Chinese conglomerate. Investors worry about Dalian's high leverage, ties to the Chinese government, and motivation/plans for AMC, as their approach and priorities may be considerably different from traditional Western-based companies.
AMC's outlook is much healthier than the market is giving it credit for. While the company does have internal and external challenges, we believe they are not as severe as investors fear, and we believe the company will successfully improve its profits over the next four years.
Attendance changes are mostly cyclical – consumers still respond enthusiastically to great movies
Despite the weak summer, 2017 North American box office revenues were $11.1 billion, only 2.7% below the record-breaking 2016 results and the third consecutive year over $11 billion. While attendance declined 5.8%, year over year attendance fell by a similar rate in 2014 and 2010, followed by rebounds in later years. The average ticket price increased by over 3% to $8.93 in 2016, indicating little resistance to higher prices by movie-goers.
While a very small sample, December 2017 industry box office revenues increased 11% year-over-year to a record high. Similarly, revenues for the first two weeks of January 2018 are up 6.1% from a year ago, also a record high.
We think much of the recent box office weakness is due to the dull movie slate last year. When studios produce appealing movies, customers show up in large numbers. This past fall, Stephen King's It became the #1 horror movie of all time ($375 million domestic revenues, $700 million worldwide), and Beauty and the Beast grossed $1.3 billion. Star Wars: The Last Jedi grossed nearly $600 million.
Management cited a surprising potential source of weakness in 2017 box office revenues: the sharp decline in the number of PG-rated films, particularly animated films, compared to a year ago. This class of movies is highly popular with families, a large and important customer segment. We don't think PG-rated movies are going away any time soon.
Streaming services no doubt reduce some demand for cinema-going. Yet it is also possible that these services expand the market for movie-watching rather than solely reducing in-theater demand. Also, many consumers subscribe to Netflix and Amazon Prime Video as a replacement for regular TV, and use it to watch/catch-up/binge on TV series. Similarly, the streaming services generally are unable to meet consumers' demand for first-run movies.
Premium video-on-demand talks appear to have stalled (yet again)
This service is being resisted by the theater industry, which retains considerable negotiating power, particularly as it continues to consolidate. Even if this service went forward, it could be priced as high as $30-50 per movie, reducing its appeal to consumers. Similarly, theaters might easily negotiate for a meaningful slice of these revenues. AMC has stated repeatedly that this service would be a financial positive for the company if implemented. As talks have been on-going for over five years, we see little progress in the visible future.
One related threat is the increasing production of original titles by Amazon, Netflix and perhaps Apple. These movies would likely be released only in streaming format, completely bypassing theaters. We don't expect this channel to become significant for several years.
MoviePass model is unsustainable and doesn't hurt average ticket prices
MoviePass is a privately held company that allows subscribers to see a movie a day, every day, for only the cost of a $9.95 monthly fee. This is an unsustainable business model, as MoviePass pays full price to buy all the tickets it provides its subscribers. Essentially, the more successful it becomes in terms of volume, the more money it loses. We find it amazing that a business model that loses a little on every sale can be seen as an attractive investment.
AMC continues to upgrade its operations to drive higher same-theater revenues
AMC has long had a history of innovations, and the company continues to develop new methods for improving same-theater revenue and profit growth. Each of these innovations adds value to the movie-going experience, differentiates it from the at-home experience, and allows AMC to increase its attendance and raise ticket prices.
Technical innovations including 3D, IMAX, Dolby, premium large format and other enhancements improve the visual and audio quality, and are being expanded into more of the company's theaters.
AMC is a leader in upgrading seats to luxury recliners, with an installed base of about 22% of the company's theaters. These seats improve attendance by 40% in the first year after installation, particularly in mid-week showings which attract more adults (who tend to pay higher prices than teens or children). Carmike theaters have only about 2% of seats upgraded, offering rates of return on investment spending of well over 25%.
The clear success of this upgrade program motivates AMC's heavy capital spending in seat upgrades.
With higher attendance comes more high-margin food and beverage sales. Furthermore, the company is expanding its food and beverage offerings to include restaurant-quality meals, premium beers/wine/mixed drinks, customized coffee and other items that provide appeal beyond buttered popcorn, candy and soda. Dine-In Theaters offer chef-inspired menus that can be delivered to seats or tables. This service is currently provided in 430 screens, up from 342 a year ago.
Other initiatives include reserved seats, internet ticketing and selling movie merchandise inside the theater. Using data from its loyalty program and other sources, AMC is developing more dynamic pricing to maximize revenues.
AMC is making progress with integrating its acquisitions
AMC's hands are full with integrating their trove of new theaters. The Carmike acquisition has been seen as a difficult integration – most of the issues revolve around the need to upgrade the theaters more quickly which appears to be progressing reasonably well. We believe the European integrations are on-track. Despite the complexity of the integrations, the European theaters offer considerable opportunities. In Odeon's markets, for example, the population density is higher but the number of theaters per million population is about half that of the United States, offering considerable incremental revenue and profit potential from bringing luxury recliners and improved food and beverage options to consumers there.
Company is taking actions to improve its ability to reduce its leverage
Management is focused on reducing its debt to about 4x EBITDA by 2019, with much of the improvement coming from higher earnings. To help boost its near-term earnings, AMC implemented a $30 million incremental EBITDA-improvement program in August to be completed by year-end.
Additionally, AMC is selling an additional $165 million (expected proceeds) in non-strategic assets over the next two years, including its remaining $6.5 million stake in National CineMedia. It may also undertake a partial IPO of its European operations to raise cash.
If free cash flow in 2018 becomes too tight, the company could easily slow its aggressive pace of $450 million in net capital spending. Furthermore, with no significant debt maturities until 2022, the company has considerable runway while it boosts profits and awaits an industry recovery.
Dalian Wanda ownership appears benign
We consider Dalian Wanda to be a lightly-involved parent company, keeping a separation between its operations/finances and those of its subsidiary. Concerns over its opaque finances and motives are understandable but we believe that AMC will be operated to maximize its value to Dalian Wanda, and hence all shareholders.
Dalian Wanda is a large privately-held Chinese conglomerate. The company is a member of the Fortune Global 500 (at #380, similar to Schlumberger and Medtronic), is the world's largest commercial property owner, the world's largest cinema owner (~12% of global box office), and has operations in consumer/internet businesses, sports, movie production, luxury yacht production, and a wide range of financial services.
Recently Dalian Wanda company has taken steps to reduce its high debt levels, including new equity issuances at various subsidiaries where the capital structures are more transparent.
The founder and chairman, Wang Jianlin, is closely aligned with the Chinese government. Formerly a regional government official, with 16 years of experience in the army, he was the Office Director of the Xigang District Government in Dalian province, and served as a deputy in the 17th National Congress of the Communist Party of China (2007). He is the Vice-Chair of the Global Advisory Council of Harvard University, and received the 2016 Malcolm S. Forbes Lifetime Achievement Award, becoming the first Chinese mainland entrepreneur to win the prestigious award.
COMPANY FORWARD GUIDANCE
AMC updated and reduced its forward guidance on November 6 in conjunction with its third quarter earnings release. The company doesn't intend to update this guidance or provide guidance in future years.
AMC Entertainment's valuation is attractive, trading at a 7.2x multiple on estimated 2017 EBITDA and a 6.7x multiple on estimated 2018 EBITDA. AMC shares provide a generous 5.6% dividend. Compared to its peers, AMC trades at a 22-23% discount. We believe this is due to the company-specific issues including its higher debt, Dalia Wanda's ownership, and its aggressive acquisition strategy.
On a EV/screen basis, AMC trades at an even larger discount of 46% to its peers. While Marcus has other resort and hotel businesses, the Cinemark, Cineplex and Regal Entertainment companies are more comparable to AMC. Regal's higher value reflects its pending acquisition by Cineworld Group.
We are applying our standard end-of-transition valuation methodology to AMC Entertainment. We anticipate that the primary issues will be adequately resolved by the end of 2020, for about a 36-month transition period. Our estimates for the primary value drivers (revenues, EBITDA margin, net cash position, and EBITDA multiple) in the post-transition scenario are outlined below:
- Revenues – We are assuming that revenues increase to $5.3 billion, about 3% higher than our estimate for 2017 revenues. Essentially all of the increase is due to the added revenues from the March 2017 acquisition of Nordic, and any incremental revenue gains are offset by theater divestitures and closures.
- EBITDA margin – We estimate an increase of 1.8 percentage points, or 180 basis points, to 18.0% by 2020, from our estimated 16.2% for 2017. The increase is produced by better profitability in U.S. operations along with increases in the lower-margin European operations.
- EBITDA multiple – We assigned a 7.5x multiple to the post-transition AMC, a modest increase from its current 7.2x multiple, yet still at a discount to peers. If AMC were to show further or faster margin improvement, additional uplift in box office revenues and attendance on a same-theater basis, combined with some debt paydown, we would expect the multiple to increase closer to the peer average.
- Current cash balance and incremental cash flow – We are estimating $200 million in incremental cash accumulation through 2020.
- Gross debt – We assume this remains unchanged over the investment horizon.
- Shares outstanding – We are assuming this share count remains unchanged.
Sources of value creation
Compared to the current $14.40 share price, the increase to the $25.18 target price represents $1.39 billion, or $10.78/share, of net value creation. About half (49%) of the net value creation is produced from margin improvement, which is generally within the company's control. An increase in the EV/EBITDA multiple, adding 20% to AMC's value, is a more tentative source of value creation given the company's leverage. If the multiple deteriorates to 6.5x, with all else being unchanged from the "Current" position, the shares would be valued at about $10, for about 30% downside. With the company's tight cash flow, we expect little value creation from cash build-up.
A brief note on EBITDA
We typically use the EV/EBITDA multiple to value most companies. A major appeal for us is that EBITDA focuses on cash flow rather than accounting earnings. Depreciation and amortization are excluded, for example, as they are accounting costs based on historical actions.
Another significant appeal of EV/EBITDA is that it not only explicitly focuses on the value of the operating company regardless of the capital structure, but it also separately values any unrelated assets and liabilities. The approach is widely used in private equity transactions, which increasingly drive public equity valuations. An additional merit of EV/EBITDA is that it allows useful comparisons of similar companies even if they have different capital structures.
In a straightforward business, the Enterprise Value ("EV") is the value of the equity (market capitalization, or share price x number of shares outstanding) plus any debt, less cash. It is the value of the operating business (the "enterprise"). If the company was acquired, the buyer would pay for the entire enterprise, not just the equity. Debts may be paid off immediately or carried over to the buyer, but one way or another the buyer would be obligated to cover them.
We compare the enterprise value to the cash operating profits of the business (earnings before interest, taxes, depreciation and amortization, or "EBITDA") to produce the EV/EBITDA multiple.
The principal shortcoming of using EBITDA is its exclusion of taxes and capital expenditures. Interest costs are also excluded, as they are not operating costs but rather financing costs associated with capitalizing the business. We incorporate these costs subjectively when we assign the EV/EBITDA multiple – admittedly a form of art. Generally, the higher quality the business (margin size, stability, growth prospects, competitive positioning, management, needs for new capital) the higher the multiple.
SUMMARY OF CHALLENGES/MAJOR RISKS
As outlined earlier, AMC faces numerous challenges and risks in its turnaround, including the following:
- Revenues: potential declines in industry-wide movie attendance, driven by the appeal and frequency of releases in domestic and international markets, as well as by substitutes like streaming services and premium video-on-demand, which also might be affected by changes in the net neutrality rules. Additional revenue risk could come from weakness in average ticket prices or food and beverage revenues.
- Integrating its acquisitions: potential difficulties in successfully integrating and operating its large domestic and recent international acquisitions could produce weaker revenues and profits for AMC.
- Cash flows and debt: AMC carries considerable debt and produces moderate free cash flows after dividends. If cash operating profits decline meaningfully, AMC may need to reduce or eliminate its dividend, sell new (and dilutive) equity or take other actions to preserve its financial flexibility.
- Dalian Wanda stake: The motivations of the controlling shareholder are unclear.
- Disclosures: AMC disclosed on December 4th that it erred in calculating pro forma attendance figures for its Carmike acquisition. While likely an innocent mistake, this type of error could indicate further accounting or disclosure issues.
Other meaningful risks include the following:
Market risk (risks related to public securities markets):
- Investors may lose confidence in the magnitude or timing of a successful turnaround.
- Stock market may fail to assign the estimated target multiple on the company's profits.
- Capital market changes could impair the company's abilities to obtain or extend financing.
- Rising interest rates would increase AMC's financing costs on its $1.4 billion in existing floating rate debt, as well as any new financings.
- European currencies may depreciate against the U.S. dollar.
Sovereign and regulatory risk (risks from actions by governments):
- Geopolitical events and other related circumstances.
- Increase in trade barriers including tariffs and/or quotas.
- Changes to U.S. and potentially other foreign country laws, financial, banking and other regulations, tax laws and trade and other policies.
AMC has its roots in the 1920 purchase of the Regent Theater in Kansas City, Missouri by the three brothers, Maurice, Edward and Barney Dubinsky. After decades of incremental expansion from single theater construction and small acquisitions, the company opened the industry's first multiplex (multiple screens in same building) theater complex in 1962.
In 2004, the company was acquired for $2.0 billion by a private equity consortium led by JPMorgan, Apollo Global Management and other private equity firms. Dalian Wanda acquired AMC from this group in 2012 in a transaction valued at $2.7 billion. AMC returned to the public markets in December 2013 with an initial public offering of 21 million Class A shares at $18/share.
AMC currently owns, operated or had interests in 1,006 theaters and 11,046 screens in 15 countries. They are the No. 1 theater chain in nine of these countries, and has the No. 1 or No. 2 market share in the three top U.S. markets (New York City, Los Angeles and Chicago) and in 22 of the top 25 U.S. metro markets. In Europe, AMC owns Odeon/UCI cinemas, which operate theaters in the United Kingdom, Spain, Italy, Germany, Austria, Portugal and Ireland. Its Nordic Cinema Group is the largest theater operator in Scandinavia and the Baltic Region. About 75% of revenues are generated in the United States, with the balance in International markets. Currently the International markets are lower-margin than U.S. markets.
AMC is a leading partner with IMAX, and currently is the largest IMAX exhibitor in the United States with a 51% share, nearly double that of the second largest exhibitor.
Revenues are produced principally from box office admissions and theater food/beverage sales:
Movie ticket revenues are the principal source of revenues. Nearly all films shown at AMC theaters are first-run movies licensed from major film production companies, as well as from independent distributors on a film-by-film and theater-by-theater basis. Typically, the distributor receives a specified percentage of the box office gross revenues, while in other cases the distributor will receive a scaled percentage based on box office performance. In 2016, the seven largest distributors accounted for about 90% of AMC's domestic box office revenues.
Food and beverage
This category produces about 31% of AMC's revenues. While popcorn, soft drinks, hot dogs and candy are perennial revenue producers, the company has expanded and upgraded its menu to include made-to-order meals, flatbread pizzas, healthy snacks, premium beers, wine and mixed drinks. The company's Dine-In Theatres (total of 430 currently) offer "chef-inspired" meals delivered to in-theater tables.
Other revenues come from related sources including on-screen advertising, rental of theater auditoriums, arcade games, and ticketing and other fees.
AMC Stubs® customer loyalty program
This membership/loyalty program has produced about $22 million in fees received for the nine months through September 20, 2017. Revenues are allocated to box office and food & beverage. The program currently has 10.1 million active member households. Members represent about 25% of year-to-date 2017 attendance.
For much of its history, AMC's produced revenue growth from new theater construction, expansion of theaters through multi-plexing, and higher same-theater revenues from higher ticket prices and additional food and beverage sales. Small acquisitions added to growth, as well.
Acquisition-related growth accelerated with the acquisition of 621 screens from then-bankrupt General Cinemas in 2002. The 2006 acquisition of over 2,000 screens from its merger with Loews Cineplex Entertainment nearly doubled the company's screen count to 5,672 screens. Between 2013 and September 30, 2017, AMC added 6,404 screens from acquisitions.
With its acquisition of Carmike Cinemas, then the fourth-largest cinema company in the United States, AMC became the nation's largest cinema company. With a 21% market share, AMC appears to be approaching its size limits for anti-trust purposes, particularly as it was required to divest numerous theaters from its more recent acquisitions due to U.S. Justice Department rulings. Looking for new growth, AMC expanded overseas with its acquisitions of Odeon and UCI Cinemas in 2016 and Nordic Cinemas in 2017.
With its currently high debt, AMC's domestic strategy will largely focus on improving same-theater revenue growth, with seat upgrades, improved dining experiences and other upgrades. In Europe, the strategy is less-mature and less-defined, although we anticipate that AMC will similarly look to improve same-theater revenues. Interestingly, AMC recently commented about potentially spinning off its European business with an IPO, likely to raise funds to repay some of its debt.
The U.S./Canada movie theater industry is slow-growth and mature, with total box office revenues of just over $11 billion. This is comparable to 2016 when industry box office revenues reached a record $11.4 billion. Industry box office revenues have increased at an average annual growth rate of about 2% over the past 10 years. Revenues are subject to modest cycles, driven by the quantity and quality of new movie releases and other factors previously mentioned. In 2014, revenues declined about 5% and in 2011, revenues declined about 4%. In both cases, revenues recovered to trend levels in following years.
Over the past decade, average annual ticket price increases of about 2.8% slightly offset average annual attendance declines of about 0.8%. The North American industry is heavily concentrated, with the top four companies (AMC, Regal, Cinemark and Cineplex) holding a combined 55% share of the number of theaters. These four companies captured as high as 65% of the box office revenues. After the top four, the companies are considerably smaller, with the fifth largest company, Marcus Corporation, having about half the screen count of the fourth largest. Consolidation offers considerable benefits: greater negotiating power against the movie production companies, greater local market pricing power, higher economies of scale, higher barriers to entry, and the ability to capture more value from successful innovations.
Industry concentration among the top four has likely reached its limit in North America. Further consolidation would likely be combinations of smaller companies or a major theater company acquiring a smaller theater company in an underpenetrated market. Interestingly, in December, top four theater company Regal Entertainment agreed to be acquired by Cineworld Group plc, the largest cinema company in the United Kingdom (this deal might actually have been a disguised acquisition of Cineworld Group).
AMC has two classes of common stock. Class A and Class B are identical, and participate in any dividends ratably based on the combined share count, except:
- Class A has one vote per share, while Class B has three votes per share
- Class A is not convertible, while each Class B share is convertible into one Class A share.
At October 31, 2017, the company had 129 million shares outstanding:
- Class A: 53.2 million shares
- Class B: 75.8 million shares
Dalian Wanda Group holds all 75.8 million Class B shares, giving them 81% voting control and a 59% economic interest.
On February 13, 2017, AMC issued a well-timed 20.3 million shares of Class A common at $31.50 ($640 million) to repay the $350 million bridge loan related to the Carmike acquisition.
On August 3, 2017, the company approved a program to repurchase $100 million shares of Class A stock over the next two years. As of November 3, 2017, the company had repurchased $30 million of shares at an average price of $14.86.
AMC currently pays a $0.20/share dividend, totaling $26.5 million per quarter. The company has paid a $0.20/share dividend every quarter since June 2014.
AMC had corporate borrowings totaling $4.37 billion at September 30, 2017. Other than about $62 million in promissory notes and revolving credit, the company's nearest maturity is the $865 million Term Loan due in 2022. About $1.59 billion of AMC's debt has floating interest rates. The company had an additional $668 million in capital and lease financing obligations and less than $5 million of off-balance sheet obligations.
The revolving credit facility had $152 million in remaining borrowing capacity at the end of the September 2017 quarter. The company was in full compliance with all financial debt covenants at the end of 3Q17. Moody's currently gives AMC's debt an overall rating of B1, which is below investment grade.
Board of Directors
AMC has an eight-member board, chaired by Lin Zhang since the 2012 acquisition by Dalian Wanda. Zhang is also a member of Dalian Wanda's board and of Wanda Cinema Line Corporation's board that oversees all of Dalian Wanda's global cinema businesses. One other member, Maojun Zeng, currently President of Wanda Cinema Line Company, is also a Dalian representative. A third Dalian executive, Jack Gao, resigned from all Dalian-related boards and roles in October. The company and Gao termed the departure as amicable. It is not clear whether this seat will be filled.
The other six members include the following:
- Adam Aron – CEO of AMC.
- Lloyd Hill – Retired as CEO of Applebees in 2006.
- Howard W. Koch – former president of the Academy of Motion Picture Arts and Sciences (the "academy" in the Academy Awards) and former Academy board member (2004-2013).
- Kathleen Pawlus – retired CFO/Chief Operating Officer of accountant Ernst & Young's Global Assurance business, the group's largest practice line.
- Anthony Saich – Director of the Ash Center for Democratic Governance and Innovation and Daewoo Professor of International Affairs at Harvard University.
- Gary Locke – former governor of the State of Washington (1996-2004), former Commerce Secretary of the United States (2009-2011), former U.S. ambassador to China (2011-2014).
With Dalian Wanda's controlling vote, we find the issues of governance and board quality relatively moot, although we are encouraged that the board has members like Locke and Saich that would likely be effective at bridging potential cultural gaps between the Chinese ownership and the American/European management teams. Koch's presence could provide highly valuable insight into Hollywood's motivations and economics, potentially strengthening ties and negotiating effectiveness in areas such as PVOD.
The board seats are classified, in that there are three classes of directors (Class I, II, and III) that are each elected in staggered terms with one Class each year. Non-employee director compensation averages $160,000, which is in-line with overall large public company averages.
Other than the CEO, most of the company's senior officers have had long tenures with the AMC organization, reflecting stability and perhaps a hands-off role of Dalian Wanda.
Adam Aron, CEO, AMC Entertainment – CEO/board member since joining in February 2016, and has prior experience as CEO of Starwood Hotels, Philadelphia 76ers (also co-owner), Vail Resorts and Norwegian Cruise Lines. He also was a senior operating partner of private equity firm Apollo Management for nine years. He has an MBA from Harvard Business School and an undergraduate degree from Harvard College.
Craig R. Ramsey – Chief Financial Officer since June 2007. He has been with AMC and its predecessor companies since 1995, holding senior finance and accounting roles since 1997.
Elizabeth Frank – Executive Vice President, Chief Content & Programming Officer since July 2012, and joined AMC in 2010. Prior experience includes senior leadership roles at AmeriCares, Time Warner, and McKinsey & Company. Ms. Frank holds a Bachelor of Business Administration degree from Lehigh University and a Masters of Business Administration from Harvard University.
John D. McDonald – Executive Vice President, U.S. Operations of AMC and predecessors since July 2009. He joined the AMC organization in 1995. McDonald is an advisory board member of the National Association of Theatre Owners, the principal trade organization of the theater industry.
While difficult to directly quantify the impact of strong Environmental, Social and Governance (ESG) practices, we believe these matter to investor relevancy, economic sustainability and business quality, which drive long-term revenues, profits and valuation. Increasingly, solid ESG practices indicate well-run companies, and the lack of attention to ESG issues may indicate other unseen shortcomings.
AMC Entertainment is ranked by MSCI as Overall Laggard on its ESG Practices. While its low impact on the environment produces a "Leader" rating for Environmental practices, its "Laggard" status under Governance (likely due to Dalian Wanda's firm control) and "Average" status under Social practices criteria pull down its overall ranking. The company was not indicated as having involvement in any recent ESG controversies regarding legal or regulatory matters or any other generally accepted norms.
This report uses sources which we believe to be reliable. However, we cannot guarantee its entire accuracy. New Generation Research and related companies and their employees may at times hold positions in any of the securities mentioned herein.
Sources include: AMC Entertainment news releases, annual reports and other regulatory filings and websites; Bloomberg; Reuters; Schwab research; Fidelity research; Nasdaq; MSCI; Factset Earnings Insight; National Association of Theatre Owners; Rentrack/comScore; Redwood Capital North American Cinema Exhibitor Report 2016; Box Office Mojo; Fortune Magazine and fortune.com; The Wall Street Journal; Barron's; The Turnaround Letter analysis and other sources. Chart courtesy of stockcharts.com.