AMC Entertainment Holdings Inc. continued to solidify its position as the world's largest theater chain with the surprise acquisition of Nordic Cinema Group.
The company has added 6,167 screens to its empire since the December 2015 closing of the Starplex Cinemas acquisition, including the 664 Nordic Cinema screens. AMC said it expects to close the Nordic deal in the first half of this year, pending regulatory approvals and other customary closing conditions.
Nordic is not the biggest acquisition by number of screens the company has undertaken in recent years, but at nearly $1 billion it is the largest payout. In a Jan. 23 note on the transaction, FBR & Co. analyst Barton Crockett pointed out that the new addition represents about 12% of AMC's enterprise value, 25% of its market cap, and it will add about 10% to its adjusted EBITDA.
"We thought AMC would take some time to digest its recent Carmike and Odeon deals before pursuing more M&A," Crockett said in the note. "The argument for this deal we suspect will be predicated on continuance of the recent high single digit growth trend at Nordic, and scale advantages as Dalian Wanda-controlled AMC solidifies its position as the largest global theater-group."
Investors seem to be ambivalent about the deal. After the news, AMC shares opened up almost 3% on the five-day chart, but then dropped precipitously before slowly regaining some ground. As of midday trading Jan. 25, shares were up about 1.5% from five days prior.
The uncertain reaction to the Nordic deal is unique in the recent past. Shares spiked in March 2016 on the announcement that AMC would purchase Carmike Cinemas for $834.4 million, expanding its empire by 2,895 screens. Shares jumped again on the acquisition of Odeon & UCI Cinemas Group announced in July 2016. For the 12 months leading up to the Nordic announcement, AMC's stock is up 69.8%, compared to just 16.2% for the SNL Kagan Media & Entertainment Index.
While investors weigh the value of a Nordic Cinema deal against other AMC deals, rating agencies have a clear take on the development, and it is not positive.
Moody's first chimed in, putting the company's corporate family ratings under review for downgrade. Then S&P did the same, putting the company on CreditWatch Negative. S&P was particularly concerned with the volume of acquisitions the company had undertaken and how that would affect its ability to operate in the short term.
"AMC's ability to integrate its acquisitions and recognize synergies will be critical to its deleveraging plans. Integration missteps could lead to leverage increasing well above 5x," the agency said in a note on its action.
The ratings reviews come as AMC's risk status was already uncertain. The company is running at a B2 long-term credit rating from Moody's, which implies a high degree of credit risk on a speculative debt investment. It is rated at B+ at S&P, a similar state of speculative affairs. If it slips below those ratings, AMC would be the riskiest debt issuer among its peers Regal Entertainment Group and Cinemark Holdings Inc. Moody's also has a B1 probability of default rating on AMC, which was last determined in March of 2016.
To avoid a more highly speculative rating, S&P said it wants to see AMC manage leverage below 5x "on a sustained basis within one year of the Nordic Cinema transaction's closing." Crockett at FBR estimates that AMC's leverage will stand at about 5.5x after the deal. If AMC is to hit its target 4.7x leverage ratio, the analyst estimates it will need to raise $780 million in cash, about two-thirds of which could come from required theater sales in the U.S. related to antitrust orders on its Carmike acquisition.
However, the company's ability to make up the remaining slice of cash will depend not only on AMC's ability to execute on its operations despite integration requirements, as S&P pointed out, but also on the theater business as a whole, as Crockett pointed out.
"A key question, however, is what happens to the box office in 2017. We assume modest erosion against a tough comp," Crockett said in the note.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.