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AMC Entertainment Holdings (AMC) made its public debut on Wednesday, December 18. Shares of the theatrical exhibition company ended their first day with gains of 5.0%.

I am a bit skeptical to buy shares at current levels given the debt and the quick "flip" made by previous owner Wanda after buying the company just 15 months earlier. Therefore I remain on the sidelines as shorting a recent public offering remains a very risky business.

The Public Offering

AMC owns, operates or holds an interest in 343 theatres with a total of 4,950 screens, mostly in North America. The theatres are typically located in major metropolitan areas with the company holding a large market share in big cities like New York, Chicago and Los Angeles. Including Philadelphia and Dallas, those five metropolitan areas generate roughly 40% of attendance and revenues.

Some 200 million customers visited AMC's theatres in 2012. The size, reputation, financial performance and history of innovation, combined with a strong market presence, are strong competitive points of the company. For the future, AMC focuses on quality over quality.

AMC sold 18.4 million shares for $18 apiece, thereby raising $332 million in gross proceeds. All shares were being sold by the company with no shares being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $18-$20 per share. Shares were eventually sold at the low end of the preliminary initial public price range.

Some 24% of the total shares were offered in the public offering. At Friday's closing price of $19.68 per share, the firm is valued at $1.85 billion.

The major banks that brought the company public were Citigroup (C), Bank of America/Merrill Lynch (BAC), Barclays, Credit Suisse, FBR, HSBC, among many others.

Valuation

AMC focuses on quality, investing to upgrade and invest in theatres and the entire experience. As such AMC focuses on comfort, food and beverage, engagement and loyalty, sight and sound and targeted programming.

Some of these "innovations" include leg rests, reserved seating, full service bars, dining, Imax format and crisp sounds.

Note that back in 2012, AMC was acquired for $2.6 billion by Wanda, which in just over 15 months aims to sell the business to the general public again. The current enterprise value stands at around $3.5 billion, marking a nice profit in a short time period.

For the year ending in March of 2012, AMC generated annual revenues of $2.52 billion, up 6.7% on the year before. The company narrowed its losses from $171.2 million in 2011 to $90.5 million last year.

Revenues for the nine months of this calendar year came in at $2.04 billion, up 10.5% compared to the comparable period last year. The company posted earnings of $80.5 million, up from the $54.2 million reported in the comparable period a year earlier.

The company operates with $130.6 million in cash and equivalents. Total debt stands at around $2.19 billion, resulting in a net debt position of $2.06 billion. Estimated net proceeds of around $300 million could be used to reduce leverage, including notes carrying a 8.75% interest rate, reducing annual interest payments by about $25 million.

This could boost net earnings toward $100 million. At the current valuation of $1.85 billion, this values equity in the business at 0.7 times annual revenues and roughly 18 times earnings, when factoring in the resulting deleveraging from the public offering.

Investment Thesis

As noted above, the offering of AMC has not been spectacular. The company priced the offering at $18 per share, some 5.3% below the midpoint of the preliminary offering range. Ever since, shares have recovered a bit, trading some 3.6% above the midpoint of the preliminary offering range.

Investors have been relieved with recent revenue and earnings growth. Further growth, as outlined by AMC's quality strategy, is aimed to boost average revenues per visitor. In total the average visitor now spends $13.56 on a twelve-month trailing basis, while the company has little over 200 million visitors per annum.

While the vast majority of revenues are derived from ticket sales, of about $9.04 per ticket, the food and beverage sales are very important as well at an average of $3.92 per visitor.

Obviously there are some key risks related to the deal as Wanda aims to flip the company for a quick buck after last year's acquisition. The strong market returns and the nearly 40% year to date returns of competitor Regal Entertainment (RGC) have possibly prompted Wanda to sell the business already.

There are quite a few risks related to the deal, including the $1.7 billion net debt position following the public offering. Historical losses are key risks, as well as emerging competition from the likes of Netflix (NFLX). On the other hand, operating cash flows allow for deleveraging can make a meaningful impact to the bottom line.

On the other hand, AMC is reporting solid growth for now, and is an ionic brand name. Yet it remains to be seen how many more operational improvements can be achieved being in the hands of private equity funds for eight years prior to the Wanda deal.

Weighing these pros and cons and I am quite hesitant to pick up some shares at current levels. For that reason I remain on the sidelines with a slightly bearish stance, mostly on the back of the high debt position.

Source: AMC Networks: Don't Invest, Just See A Movie