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Competition, slow growth for exhibitors narrows M&A opportunities for 2020

The U.S. theater industry faces fewer regulatory hurdles than ever for M&A in 2020, yet changing industry trends mean the already mature exhibitor market may see few new buyers next year.

The U.S Department of Justice in November filed a motion to terminate a 71-year-old rule restricting certain studios from owner theaters, arguing that the restriction was no longer necessary in the modern era of streaming video. Few dispute that streaming competition has reshaped the film marketplace. What remains unclear is the remaining appetite for buying into the traditional exhibitor business. Industry analysts pointed to streaming players and big media conglomerates as the most likely to be interested in the theater business.

Compared to streaming, theater ownership is an expensive, high-overhead business into a low-growth market, noted Kagan analyst Wade Holden. Kagan is a media research group within S&P Global Market Intelligence.

Theatrical exhibition is also a market that has already seen a lot of consolidation in the U.S. AMC Entertainment Holdings Inc., for example, acquired three large movie chains in three years: Carmike Cinemas, ODEON & UCI Cinemas Group and Nordic Cinema Group. Together, the deals helped to boost AMC's revenue from $1.47 billion in the second half of 2015 to over $3 billion in the second half of 2019. U.K.'s Cineworld Group PLC, which bought the U.S.-based Regal Entertainment Group in 2018, saw its revenue nearly quadruple between the second half of 2017 and the second half of 2018 following the deal.

Yet much of the U.S. theatrical revenue growth has been through the sale of concessions and other non-box office revenue, as Kagan details in its research.

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Theater companies jumped into new subscription programs as a way to compete and boost admissions, but the discount-ticket model also is weighing on revenues and average ticket prices.

"It's a very mature industry. I don't know how much more [studios] could get out of it," Holden said.

Those best-positioned to take advantage may be studios associated with large vertically integrated media companies like The Walt Disney Co. or AT&T Inc.'s WarnerMedia, independent film producer and investor Justin Begnaud said in an interview. That would allow the studios to pick up revenue from concessions and ticket-price increases that is split with exhibitor partners.

"I think these big corporations … will kind of save the movie theater business," Begnaud said. "For Disney it makes perfect sense. ... No one understands the theatrical experience better than Disney."

Begnaud pointed to Disney's range of brand franchises, its box office dominance and its history of creating lucrative bricks-and-mortar experiences as reasons why it could dominate in the exhibitor market, where it could put any underutilized space to work as experiential destinations that include rides, virtual reality kiosks and Disney merchandise stores as well as places to showcase its films.

Former Warner Bros. executive Don Tannenbaum disagreed, saying that if Disney wanted to offer theatrical bricks-and-mortar experiences, it would be more strategic to build rather than buy. He said that in addition to the challenges facing the exhibition business amid the rise of streaming and gaming and other in-home entertainment options, acquiring and renovating a theater chain requires entering a high-overhead real estate business that includes many underperforming properties with little market potential.

"It comes with a lot of baggage," Tannenbaum said of owning a theater chain. "I don't think the business is going to change due to the [regulatory changes], I think the business is going to change because of what's going on in the industry."

Streaming companies could offer another pool of potential buyers, as Netflix Inc. and Amazon.com Inc. look to increase the profile of their original film releases and qualify for theatrical awards. Netflix recently signed on to manage New York's Paris Theatre. News of the lease followed reports earlier in the year that Netflix was in talks to acquire the historic Egyptian Theatre in Hollywood. Amazon was also reportedly a bidder in the sale of Landmark Theatres before it was acquired by Cohen Media Group LLC.

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