Professional Documents
Culture Documents
Sector Review
May 2014
SECTOR REPORT
Contact:
Gregory Bedrosian
CEO & Managing Partner
gbedrosian@redcapgroup.com
212.508.7111
Vikram Chandrasekaran
Vice President
vchandrasekaran@redcapgroup.com
212.508.7106
Redwood Capital
950 Third Avenue
Suite 2001
New York NY 10022
www.redcapgroup.com
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PROJECTED PERFORMANCE
According to PwC, the global box office is expected to grow at a CAGR of 5.4% over the next five
years, reaching $44 billion in 2017. Box office growth is projected to outpace the 3.6% CAGR of
the overall filmed entertainment market during this time. Growth will continue to be driven
primarily by emerging market countries including China (14.8%), Russia (10.4%) and India
(10.1%). The overall BRIC market is expected to grow at a 14.4% CAGR through 2017 and to
account for 25% of the global box office, up from 18% in 2012. Both Russia and China are
experiencing significant growth in the number of screens and theaters and will continue to
generate increased box office revenues as the new theaters from recent investment come
online. China has 25,000 screens slated to open in the next five years, implying an average of 13
new screen openings per day.
The strong growth in global box office would increase the proportion of the box office revenue
to 42% of the total filmed entertainment revenue by 2017, from 40% in 2008. The shift is more
evident in the emerging markets, while in the developed markets, the revenue share of box
office to the total filmed entertainment sector is expected to rise only marginally.
The recent slate of films and lack of major blockbusters has hindered the growth of box office
revenues over the past few years. However, there are numerous major titles scheduled for
release in 2015 and 2016 which can potentially boost box office revenues in both developed
markets and emerging markets as demand for blockbuster US content continues to increase with
further globalization and access to content.
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PRICING
Global movie ticket prices rose significantly in recent years, with ticket price growth outpacing the world
Consumer Price Inflation (CPI) index in several years. While the CAGR for world inflation for 2006-2011#
was 4.2%, ticket prices grew at a CAGR of 6.5% over the same period. Rising penetration of 3D screens
around the globe has allowed movie exhibitors to increase ticket prices. According to a report by MPAA,
the total number of 3D screens increased 17% in 2013. Similarly, other premium services such as larger
reclining theater seats, direct to seat concession offerings and tiered pricing for seat selection have
contributed to the increase in ticket prices. Ticket prices are also affected by the demand for theatrical
releases and years in which there are multiple blockbuster releases see higher ticket prices on average.
The rise in ticket prices accounts for the growth in box office revenues even though admissions are slowly
declining.
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Source: IMF, UNESCO Institute for Statistics (July 2013), #data for global ticket prices available as of 2011 only
There are numerous blockbuster films slated for release in the next few years and along with increasing
value being added to the movie-going experience, it is expected that movie exhibitors will be able to
command higher pricing in the years to come. Global ticket price growth is also expected to continue to
outpace broader inflation metrics.
SCREENS
The total number of cinema screens around the world grew 4% to 134k in 2013 after rising by 5.0% to 129k
in 2012. The U.S./Canada region had the highest number of screens in the world (42,814), followed by Asia
Pacific (41,206), Europe, Middle East and Africa (39,597) and Latin America (10,694) at the end of 2013.
Asia Pacific continued its double digit growth of 11%.
According to the MPAA Theatrical Market Statistics 2013 Report, over 80% of the worlds screens and at
least 50% of the screens in every region are now digital. 3D screens specifically continued to grow at 17%
in 2013 versus 25% in 2012 and 62% in 2011. While 3D screens comprise only 40% of the total digital
screens in U.S./Canada, which were early adopters of digitization, they make up 57% and 51% of the digital
screens in Asia Pacific and Latin America, respectively. During 2013, Latin America led the world in
conversion of screens to 3D, with 42.6% growth in 3D screens compared to 24.7% in Asia Pacific, 13.2% in
EMEA and 7.1% growth in U.S./Canada. Russia has seen strong growth since 2010 as the number of 3D
screens has almost doubled in 2 years (44.8% CAGR from 2010-2012) to 1,966, and further increased to
2,190 screens at the end of June 2013.
CHART 11: WORLDWIDE DIGITAL 3D SCREENS (UNITS)
The number of screens globally is expected to continue to grow, driven by emerging markets. Going
forward, the growth of 3D screens should also continue at a healthy pace, as the fastest growing movie
markets increasingly adopt 3D screens and new screens are built as digital 3D screens. In January 2013,
RealD (a leading global licensor of 3D technologies) and Karo Film (cinema operator in Russia with 197
screens) announced a deal to convert Karo Film screens to RealD 3D technology. Cinema operators are
also focusing on China and increasing the number of 3D screens. For instance, IMAX announced that it will
add screens in the country to raise its number of 3D screens from a current 80 to 217 in the next few
years. RealD has also reached agreements with cinema operators in 2013 to equip more movie screens in
China with its 3D technology.
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While developed markets led the way with respect to digitization, emerging markets have caught up
quickly too. Digital conversion activity in Asia-Pacific also remained strong, with a CAGR of 50.2% during
2011-2013. The pick-up in Latin America is even stronger, with a CAGR of 87.2% during the same period.
Similar trend can also be seen in Russia, with digital screens expected to register a CAGR of 36.8% during
2011-2013. As of June 2013, 76% of the screens in Russia are in digital format, which is expected to have
increased up to 84% by the end of 2013.
CHART 13: INTERNATIONAL DIGITAL SCREENS AS A PROPORTION OF TOTAL (UNITS)
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This trend towards multiplexes is expected to continue as it presents an opportunity to grow ancillary
revenues, which cannot be generated in single-screen theaters. Multiplexes can exhibit a variety of other
filmed entertainment content as well as provide a valuable location for other services such as food and
beverage outlets increasing the overall quality of the movie-going experience.
Additionally, multiplexes also reduce costs having a higher number of screens in the same location enables
effective capacity management, depending upon the number and quality of movies released. Having more
than one screen at a location lowers the per-seat overhead costs for movie exhibitors. Moreover, with
screens having different seating capacities, theater operators get the flexibility to shift more popular
movies to screens with higher capacity and vice versa, thus increasing overall occupancy rates and helping
operators increase revenues in a cost-effective and manner.
THEATRICAL RELEASE WINDOW
Theatrical release window is the period between a movies release in theaters and its releases on alternate
media such as DVD, Blu-Ray, DTH and online streaming. Over the years, the duration of the window has
declined across the globe. In the U.S., the window has been reduced from over six months in 2000 to
approximately four months presently. In the U.K., box office contributes approximately one third of the
movies revenues; hence, a shorter window will ensure that the publicity costs incurred during the theater
release can also help improve sales in other viewing formats. In markets where box office revenues
comprise larger portions of total revenues, theatrical windows are generally longer. In most emerging
markets, the window is well above the global average. In India, box office forms about 74% of a movies
revenues, which explains why the window is significantly longer than in other countries. However, in
Russia, the window is well below the global average and hence proving to be a drag on movie exhibition
revenues. Going forward, it is expected that box office revenues will continue to contribute a lions share
of movie revenues (about 69% in 2015) in emerging markets. Consequently, we do not expect the
theatrical window to shorten significantly in coming years in developing countries.
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ONLINE TICKETING
A trend that has quickly established itself in the movie industry is the emergence of online ticketing.
Movietickets.com and Fandango are the worlds leading players in this industry and were created by the
theater operators themselves. Along with websites of theater chains, third-party ticketing websites that
partner with theater chains have also grown rapidly. According to Global Industry Analytics, the global
industry for online movie ticketing will reach $13.7bn by 2017. While Fandango provides access to 14,000
screens across the U.S., MovieTickets covers more than 22,000 screens in a number of countries across the
Americas and Europe.
SATELLITE DISTRIBUTION
With a majority of the theaters converted to digital technology, theaters can now use satellite distribution,
which completely bypasses physical distribution of tapes (analog or digital). Along with quality
improvements, satellite distribution also provides additional revenue opportunities such as exhibiting live
events from across the world and across genres (music, sports, etc.) for theaters. Event programming, such
as live concerts and Metropolitan Opera performances are now made possible by satellite delivery and
projection.
In an effort to improve film delivery options, movie exhibitors AMC, Regal, Cinemark and the studios
Warner Bros. and Universal Pictures formed the Digital Cinema Distribution Coalition (DCDC) in 2012.
DCDC helps individual theaters to implement technology upgrades for enabling satellite distribution. As of
now, the DCDC has covered 1,200 theaters and 17,000 screens across the U.S.
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TRANSACTION ANALYSIS
MERGERS AND ACQUISITIONS
TABLE 2: DEAL ACTIVITY SUMMARY, 2009 TO 2014 YTD
The mergers and acquisitions activity in the movie exhibition industry witnessed a buoyant environment
during 2009-2013, with activity picking up in the latter half of the period. The activity was typically
characterized by one or two large deals (over $500m) accounting for a majority of the transaction value
every year, with numerous smaller deals comprising the rest.
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By geography, the global merger/acquisition activity was largely concentrated in the developed markets in
the last five years, with the U.S./Canada region being most active in the recent past. In the region,
consolidation activity has continually increased over last five years, with the region recording the highest
number of deals across all geographies every year from 2010 onwards. We believe that an attractive
interest rate climate and improving investor confidence due to traces of economic betterment fostered
deal activity in the region. In Europe, deal activity was largely consistent over the last five years, with an
average of 12-14 deals per year despite the tough economic climate and the prevalent debt crisis. 2014
was no different, with U.S./Canada and Europe witnessing most of the deal activity so far, with the sole
high-value transaction being executed in Europe.
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From 2009-2014 (YTD), the total funds raised from private placements in the movie exhibition business
reached $5bn, with deal activity led mainly by the Asia-Pacific region. Of the 47 deals in the last five years,
32 deals were by entities in Asia-Pacific. We believe that an uncertain equity market and tighter lending
environment given worries of slowing economic growth could have prompted players to opt for private
investments. Each year, the composition was similar: a couple of sizeable debt placements, and various
small-sized equity placements.
The year 2009 was the largest in terms of deal value, comprising 30% of the total placements since 2009,
and was dominated by private placements in corporate debt of U.S. companies. All of the debt offerings
during the year were issued with an aim of refinancing existing debt and/or extending the debt maturities.
The largest offering completed was by AMC Entertainment which raised a gross of $600mn through senior
notes at 8.75% per annum due 2019 to complete the repayment of its $250mn senior notes bearing an
interest rate of 8.675% due 2012. With a similar purpose, Cinemark raised a gross of $475mn at 8.625% to
finance the repurchase of its more expensive 9.75% senior discount notes, while Regal Cinemas
Corporation raised $400mn to pay off some of its credit facilities.
In 2010, AMC Entertainment issued another $600mn debt offering, the proceeds of which it used to pay
back $325mn of its 9.75% Senior Subordinated Notes due 2020, as well as $240.8mn of the 12% Senior
Discount Notes due 2014 issued by its owner, Marquee Holdings. The remaining deals during the year
were very small (average deal size of $25mn), and were largely concentrated in China.
Private placement activity improved in 2011, and peaked in terms of deal volume (28% of total). The
prevalent recessionary environment in the U.S. as well as the debt crisis in the Eurozone had made the
public markets unreceptive, and companies were fearful of a poor response to public offerings in such an
atmosphere. These circumstances prompted theater operators to issue private debt offerings. The largest
offering was completed by Odeon & UCI Finco plc, a leading British cinema operator, which included
Senior Secured Notes worth 300mn ($485mn) at 9.0%, and Senior Secured Floating Rate Notes worth
200mn ($282mn), both due 2018. The company raised the funds for i) refinancing existing debt to reduce
the burden of interest payments on the bottom-line, and, ii) strengthening its financial position with an
aim to expand its geographical reach across Europe as well as other high-growth movie exhibition markets.
The company had initially planned an IPO to raise the funds; however, it used a private placement, likely
due to the weakness in global equity markets during that time. Similarly, Cinemark raised $200mn in June
2011 at 7.375%, to pay back its term loan of $157mn and planned to utilize the rest for general business
purposes. Among equity funding, a key deal was an investment of $69mn by Tencent Holdings in Huayi
Brothers Media Corporation (both based in China) in an effort to diversify the formers presence in the
fast-growing Chinese entertainment industry.
While the total funds raised in 2012 were lesser than those in 2011, the year was particularly important
because of the change in rationale of raising the funds. Until 2011, the key broader rationale behind
corporate debt offerings was to reduce interest burdens. In 2012, companies borrowed debt not only to
retire expensive debt but also to fund their inorganic expansion plans. In December 2012, Cinemark
completed the issue of $400mn senior notes due in 2022 to repay existing debt and to acquire 32 theater
locations from Rave Real Property Holdco, LLC for $240mn. The acquisition helped Cinemark achieve cost
synergies, as a larger footprint improved its negotiating power with concession vendors and provided the
company with a larger number of venues for on-screen advertising revenue. In another deal, Carmike
Cinemas issued bonds worth $210mn in April 2012 to replace an existing loan with strict covenants
allowing for more funds for capital expenditures and bolt-on acquisitions.
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In the last five years, there were 15 disclosed public debt offerings in the global movie exhibition industry
amounting to a total of $2.6bn. Of these, the U.S./Canada region had 8 offerings and Asia-Pacific witnessed
6 offerings, with the remaining offer issued in Europe. In terms of value also, the U.S./Canada region was
far ahead, with the total offerings amounting to $2.3bn. The offering in Europe was sized $100mn, while
those in Asia-Pacific amounted to $184mn. A sharp disparity in the average debt offering within regions is
evident: although Asia-Pacific comprised 40% of the total deals, it made up for just 7% of the total debt
raised. In contrast, the U.S./Canada region comprised 53% of the deals but formed 89% of the total debt
offering value.
The year 2009 saw no public debt offerings by movie exhibitors, as these players preferred to opt for
private placements considering the conservative sentiment prevailing in public markets. In 2010, the
overall offering size was recorded at $301mn for 2 deals. The major offering was by Regal Entertainment
Group ($275mn in August) to refinance expensive credit and secure funds for other corporate purposes.
The second one was issued by the Korean company CJ CGV Co Limited, which raised $26.5mn in October
for working capital financing. The activity in 2011 was once again led by Regal Entertainment Group,
raising $156.8mn in January 2011 and another $104.5mn in February 2011, both at an interest rate of
9.125%, to pay back the more expensive debt on its books.
In 2012, the offer rationales remained largely unchanged. Two Asian companies, CJ CGV Co Limited
($26mn in June) and Thailand-based Major Cineplex Group ($31mn in August) successfully raised money
with similar purposes. However, the biggest offering was that of Belgium theater operator Kinepolis
Group, which raised approximately $100mn in March 2012. The significance of the deal was that, apart
from the debt repayment, Kinepolis had raised the funds to be employed for capital expenditures and
financing of strategic acquisitions. The indication was an important positive, considering the economic
slump in the region.
2013 witnessed a revival in public debt offerings, as companies sought to take advantage of the sustained
low interest rate environment to extend the debt maturities and access cheaper funding. In May, Regal
Entertainment Group issued senior notes worth $250mn at 5.75% due 2023, and used $213.6mn of the
proceeds to extinguish the debt on its Senior Notes that had an annual interest rate of 9.125%. In addition,
companies also accessed debt to pursue inorganic growth. In January 2013, Regal Entertainment Group
issued $250mn worth of Senior Notes at 5.75% per year due 2025 to fund its acquisition of Hollywood
Theaters. In April 2013, Regal Entertainment Group completed the acquisition of 513 screens across 43
locations of Hollywood Theaters for $191mn in cash and also took over the latters lease obligations worth
$47mn. Similarly, in October 2013, Cineplex issued convertible debentures amounting to $100mn to repay
the debt utilized for the acquisition of 24 theater locations from Empire Theaters Limited. Cineplex
completed the acquisition for a consideration of approximately $194mn in October 2013.
In 2014, companies have continued the trend of the previous year, i.e. refinancing debt to extend
maturities and lower the interest burden. There have been two such public offerings this year to date. In
March 2014, Regal Entertainment issued $775mn principal amount senior notes due 2022 with a coupon
rate of 5.75%. The company planned to use the proceeds from this issue to repay multiple outstanding
senior notes worth approximately $761mn with coupon rates varying from 8.625% to 9.125% and due
between 2018 and 2019. Similarly, AMC issued senior notes of $375mn at a coupon rate of 5.875% in
February 2014 and used the proceeds to repay 8.75% Senior Notes due 2019.
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Out of the public offers executed since 2009, almost two thirds by volume were equity offers. In all, $2.6bn
was raised by the movie exhibition industry via equity over the last five years. By geography, Asia-Pacific
and U.S./Canada led the activity, collectively comprising almost 90% of the total equity offer volume and
more than 90% of the total offer value. The majority of the activity was concentrated in Asia Pacific and
U.S./Canada because these regions are the biggest markets for movies, Asia Pacific by admissions and
movies produced, and U.S./Canada by box office revenue. Europe, another major region for the movie
industry, saw the remaining three offers. Latin America and Africa, in comparison, are comparatively
smaller markets on a global scale, and saw no public offers after 2008. Contrary to the trend in the
mergers/ acquisitions, a significant proportion of the equity offers during the last five years (36%) crossed
the $100mn mark.
In terms of total offer value, the equity public offer market saw falling numbers from 2009 to 2012, similar
to the trend in offer volumes. With seven offers, the equity public offer market was most active in 2009. In
the period under consideration, 2009 also led in terms of total offer value with $592.07mn raised, closely
followed by 2013 at $552.3mn. The year was characterized by the Cineplex Inc. IPO which collected
$152mn, and was carried out to facilitate an exit of investors. In 2010, the total offer value went down in
the same measure as the number of offers, as the average offer value for the two years remained nearly
the same. The offer volume declined significantly in 2011. However, the year delivered the highest average
and median offer values during 2009-2012, on the back of two offers by Cinemark Holdings each sized at
approximately $200mn each. The total value of public equity offers fell drastically in 2012, primarily due to
the uncertainty around the globe due to the European sovereign debt crisis. With confidence in the equity
markets growing, equity offers recovered spectacularly in 2013, as the number of offers grew 66% and the
total offer value went up almost seven times.
2014 shows that the momentum for equity offerings started in 2013 is continuing. In just three months,
the movie exhibition industry has raised almost the same amount of money as was raised in the entire
year of 2013. There have been two large offers to date. Poly Culture Group raised $331mn through its IPO
and the Cineworld rights issue which was carried out to partly pay for its acquisition of Cinema City.
Because both offers to date have been big, the average and median offer value for the year to date are the
highest since 2009.
An interesting point to note for years 2012 onwards is the difference in the rationale of companies in
developed economies and emerging economies for raising money through equity offers. With the
economy showing signs of recovery, companies in developed markets such as U.S./ Canada and Europe
raised money mainly for expansion (both organic as well as inorganic) e.g. IPOs of Everyman Media Group
and Digital Cinema Destinations and the rights issue by Cineworld Group. Conversely, money raised in Asia
Pacific region was primarily for debt repayment, e.g. rights issues of Reliance Mediaworks ($94mn in 2013)
and Fame India ($18mn in 2012). This can be attributed to the high interest rates prevailing in India due to
monetary tightening by the central bank to combat inflation.
Over the last five years, the market for IPOs has been largely stable. Eight companies in the sector
completed their IPOs during this period, raising almost $800mn. A majority of the IPOs were for expansion,
including the Poly Culture Group IPO of $331mn. Despite this, two of biggest issues in the period were for
debt repayment (AMC) and to facilitate an exit for investors (Cineplex). Geographically, the split is similar
to total equity offerings with most of the offers being in U.S./Canada or in Asia Pacific with the lone offer in
Europe in 2013. The year 2013 had the highest total offer value raised via IPOs, mainly from the AMC
Entertainment offer ($369mn), followed by 2009 at $331mn.
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10119 Berlin Germany
Vikram Chandrasekaran
gbedrosian@redcapgroup.com
vchandrasekaran@redcapgroup.com
212.508.7111
212.508.7106
Copyright 2014 Redwood Capital Group LLC. Redwood Capital is the marketing name for Redwood Capital Group and its
subsidiaries. All securities transacted through RCG, LLC member FINRA/SIPC, a wholly-owned subsidiary of Redwood
Capital Group. Additional information can be found about FINRA at www.finra.org and SIPC at www.sipc.org. This report
is published solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer
to buy any security. The information herein is based on sources we believe to be reliable but is not guaranteed by us
and we assume no liability for its use. Any opinions expressed herein are statements of our judgment on this date and
are subject to change without notice.
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