AMC Entertainment - A Dealmaking Spree Gone Bad

Summary

  • AMC made three large deals in the time span of a year.
  • These deals leveraged up the balance sheet, after which traffic has taken a big beating.
  • While multiples are not that demanding, leverage is very high and free cash flow generation is low - alongside a high dividend yield.
  • I think that there are risks to the downside for this year's guidance, as the long-term business model might be under some pressure.

AMC Entertainment (NYSE:AMC) has made three substantial acquisitions in the past year that are now going bad. The company has leveraged up significantly and this is very painful amid secular headwinds, along with the impact of few blockbusters and warm weather.

The second quarter appears very poor given the big profit warning, as I see risks to the full-year guidance. This is worrying amid the debt load and poor cash flow conversion. For these reasons, I am not automatically buying the dip, even as shares are down 50% from levels seen in April. For now, I maintain a neutral stance on the business, while following the developments with great interest.

The Leading Exhibitor Across the Globe

AMC now has operations in 15 countries, in a business that encompasses 1,000 theaters and more than 11,000 screens. The company is the leading operator in most of the countries in which it operates, as its theaters draw 385 million visitors each year on a pro-forma basis. The business was originally heavily focused in the U.S., and acquisitions in Europe mean that roughly 30% of the theaters and screens are located in Europe -- although the average size of each theater on the "old" continent is typically a bit smaller.

While many have predicted difficult times for the movies business amid the "stay at home" economy and emergence of services like Netflix, the business has held up reasonably well, at least until now. The resilient performance in recent years can be explained by the fact that this kind of entertainment comes at a very competitive cost compared to other alternatives, such as dinner, theme parks, entertainment parts, concerts or sport events.

To differentiate itself from its peers, the company is investing heavily in its differentiation factors. This relates to comfortable chairs, enlarged food offerings, premium sight and sound, loyalty

This article was written by

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The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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