Hollywood Media Acquires CinemasOnline; Quick Analysis (HOLL)

Nov.29.05 | About: Hollywood Media (HOLL)

Hollywood Media, with a market cap of about $140 million, announced that it has acquired UK-based CinemasOnline for $3.45 million. According to the press release, CinemasOnline is

...a group of leading advertising sales and data services companies focused primarily on selling internet advertising on cinema and live theatre websites... CinemasOnline’s business primarily involves developing and maintaining websites for cinemas and live theatre venues in the U.K. and Ireland. These services are provided in exchange for CinemasOnline retaining the right to sell advertising on the websites. CinemasOnline currently operates websites for over 300 cinemas with over 1200 screens in the U.K., representing approximately 35% of the U.K. cinema market on a per screen basis, and over 60 cinemas in Ireland. CinemasOnline also has agreements with over 200 cinemas, live theatre and other entertainment venues to sell advertising on lobby display posters, movie brochure booklets and ticket wallets in these venues.

Some points to consider about this acquisition:

  • It looks like HOLL got a fabulous deal here. According to the press release, "Hollywood Media estimates that CinemasOnline will have approximately $5.0 million in revenue and $1.1 million in operating income during the next 12 months." With a purchase price of about $3.5 million, that means HOLL is paying less than 4 times forward operating income and less than 1 times forward sales.
  • Easy ways to improve Cinemas Online. The sites Cinemas Online provides for its theater partners are frankly horrendous. Here's a site put up for one of the best located movie theaters in London. It looks as though it's been carefully designed to make it unreadable. (You can only view content via a small window in the middle of the screen, though which you have to scroll down.)
  • The synergies are clear. By improving the Cinemas Online sites, incorporating movie information from Hollywood.com and offering online movie ticket purchases, HOLL should be able to materially increase Cinemas Online's ad and transactional revenue. Also, if HOLL can get access to showtimes and other data from the 200 participating UK movie theaters, that should complement its movie data business.
There's also potential impact on the overall perception of HOLL's stock: Hollywood Media further positions itself as an attractive play on online entertainment content and transactions, and picks up an asset at low cost.

What about the downside? First, HOLL is still not generating cash, so every transaction it does requires financing that ultimately dilutes current shareholders. In this case, HOLL raised more money than it needed -- $7 million of debt at 8% plus 700,000 warrants at the current stock price. Those warrants will reduce the upside on the stock. HOLL urgently needs to control its operating expenses so that its rapid growth will translate into growing profitability and cash flow. If it can't do that, shareholders will continue to be hit with dilution. The jury's out. The management team needs to deliver.

Second, there's a risk of further lack of focus. Hollywood Media arguably already has too many businesses. It runs online movie ticketing company MovieTickets.com (and owns 26% of it), movie info web site Hollywood.com, online and offline theater ticketing company Broadway.com, a cable TV channel, a movie info data base, and a book publishing related business. Both its movie and theater ticketing businesses are expanding into the UK market. All that for a company with a market cap of under $150 million. Now it's adding another business, and one located in the UK at that.

Finally, there's a risk that there's so much to improve with Cinemas Online that HOLL simply won't have the resources to maximise the potential here.

Full disclosure: long HOLL at time of writing. Click on HOLL chart to enlarge.