Share watch: Look at bigger picture on Cineworld's USA takeover
As a business, cinema-going seems to defy gravity. Over the decades, its demise has been confidently predicted. When television arrived doomsayers thought the jig was up. Instead, the movies prospered. Multiplexes sprouted up everywhere and attendances boomed. The latest threat to a 'night at the movies' is the internet, amid fears that with Netflix and Amazon, it may snaffle the market. But none of this seems to be happening, or not to the extent that the pessimists believed.
Indeed, the company we are examining today, the UK-based Cineworld, has prospered and been encouraged to spread its wings. It is now the second-largest cinema chain in the world with an astonishing 9,500 screens, albeit saddling itself with considerable debt to arrive at that position.
The truth is that cinema-going has come a long way since I first encountered the 'fourpenny rush'. Then everyone, old and young, went to 'the pictures' as often as they could afford. The idea that 'cinema ticket touts' could openly ply their trade in downtown Dublin every weekend is scarcely believable these days. Now, of course, the experience of the cinema is totally different. Big screens, seat comfort and grazing are an essential part of the experience. Cineworld knows this well.
Cineworld is only 22-years-old and it has shown continuous growth, scooping up 30pc of the UK market. It is also the only cinema group quoted on the London Stock Exchange.
Five years ago it bought a chain of multiplexes in Eastern Europe where rising incomes were leading to bigger audiences. But then cinema attendances tend to be resilient in most economic conditions. Its only downside is its exposure to the quality of film releases, a demand US media magnates find an agreeable challenge.
In the last five years Cineworld total revenues, dividends and pre-tax profits more than doubled. Revenues for last year were up 12pc to £890m (€1,016m), helped by the increase in ticket sales and rapid growth outside the UK and Ireland. Sales at the box office were £554m (€632m) thanks to blockbusters like 'Star Wars', 'Beauty and the Beast' and 'Dunkirk'. Interestingly, snack and drink sales jumped 11pc to £220m (€251m) and that's a lot of popcorn. To counteract the Amazon and Netflix subscription system, Cineworld introduced its own service. It allows members to watch as many films as they want for a monthly fee. This service now accounts for 25pc of its revenues. Pre-tax profits for 2017 were £120m (€137m), up more than one-fifth on the previous year. The shares trade at 269p on a very elevated price earnings of 37.
Recently the group's acquisition strategy brought it across the Atlantic and the move has scared analysts a little. It acquired the US cinema group Regal Entertainment in a $3.6bn (€3.1bn) reverse takeover. To help fund the purchase, Cineworld offered 1.1 billion new ordinary shares at 157p by way of rights issue. Buying Regal will give the company access to the largest cinema market in the world and increase its clout with the big film studios. But the analysts fear there may be a downside, a concern that the Cineworld management think is overdone. While the group entered the merger on foot of strong trading, the debt that has been racked up has some number-crunchers fingering their worry beads.
They feel that Cineworld management must drive a better performance from Regal, whose revenues fell 2pc last year, and at the same time reduce its debt. They are not certain that this can be achieved.
At the same time, they accept that the acquisition could provide opportunities to achieve substantial synergy. However, they are of the opinion the acquisition changes Cineworld as an investment proposition.
It now has a greater exposure to mature markets and has a heavily geared balance sheet which could constrain it (and investors) in the future.
It needs the confidence of the old-time film star in 'Sunset Boulevard', who was asked by a fan: "I know you? You used to be big?"
The ageing actress quickly replied: "I am big. It's the movies that have got small."
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.