On Monday, AMC’s picture continued to dim as Wall Street weighed in on the likely options facing the chain. The exhibition giant’s stock was down a whopping 20% after B. Riley FBR analyst Eric Wold downgraded the holding to ‘sell’. As reported over the weekend, AMC is already in talks with bankruptcy law firm Weil, Gotshal & Manges, the storied firm that has navigated other huge bankruptcies including American Airlines, General Motors, Lehman Brothers and Washington Mutual, among others. AMC’s $4.9 billion debt is the largest obligation in the industry and is now trading at highly distressed levels.
Meanwhile, across the Atlantic, Cineworld is facing its own existential crisis. The second largest global theater chain is the owner of Regal Entertainment in the U.S. and just recently reached agreement to acquire Cineplex, a leading Canadian chain.
In mid-March, Cineworld warned investors that a prolonged cinema closure could put it at risk of default on its loans, a situation which could threaten its ability to remain in business. Cineworld owes over $3.6 billion, a total that has likely grown as the firm has agreed to take on more debt to complete the Cineplex acquisition and is drawing its revolving credit facilities to try to remain solvent.
At America’s third largest chain, Cinemark, things are only nominally better. With over $3.4 billion in debt on its books before the crisis, the Dallas based exhibitor is raising another $250 million through an underwritten debt offering. While not (yet) lining up bankruptcy counsel, the debt sale is notable in that this new debt will hold a senior (first-priority) secured position on certain of Cinemark’s assets, placing it first in line for repayment in the event of a default.
All three of these leading chains are taking extraordinary measure to attempt to navigate a path through the current economic crisis. Likely all had hoped (and may still) that U.S. Federal aid would help fund their contingency plans. Just as likely, though, the executives running these firms are realizing that the debt fueled acquisitions and build-out growth binges they have powered through for over two decades has finally stuck them with a tab that is coming due. When faced with these existential circumstances, acquisitive executives often find it more personally permissible to take advantage of the exigent circumstances to conduct a ‘kitchen sink’ bankruptcy. After all, if you, as an executive, navigate a company into a bankruptcy, you will be remembered as the executive that ran the company off a cliff. BUT, if you run it nearly off a cliff and then a massive economic crisis comes along that you can scapegoat as that circumstance that forced you over the cliff, all of your advisors will recommend you take that opportunity to save your reputation and reorganize under bankruptcy.
In the last economic crisis, it was the U.S. automakers. General Motors and Chrysler both took advantage of the economic crisis and the U.S. government’s largesse through Congressional stimulus packages, leveraging the bankruptcy process to reorganize, fade massive debts, wash-out shareholders (common holders and pensioners, alike) and emerge far stronger than they had been in perhaps a quarter of a century. From that process, the U.S. Federal Government took massive equity stakes in the manufacturers, used to help repay the Treasury for the massive financial assistance. The lone U.S. holdout, Ford Motor Company, held off bankruptcy but has fared less well than its competitors since.
What faces the top 3 cinema chains today is not dissimilar from what the automakers faced in the last financial crisis. Massive corporations that binged on debt to fuel acquisitions, huge executive pay packages, juicy dividends and stock buy-backs are now, having failed to create a viable financial plan for difficult economic times, looking for assistance – from either banks, the U.S. Government or the bankruptcy courts.
The most likely outcome of the current paths taken by the big three exhibitors will be a Chapter 11 (or equivalent, in the case of Cineworld) bankruptcy reorganization by one (AMC) or more (Cineworld/Regal). Once one of the leading firms utilizes bankruptcy to reorganize, those that don’t are left at a competitive disadvantage, servicing costly leases, supporting under-performing locations and paying all their debts. This makes it more likely that others will also utilize the economic crisis (and the acts of their competitors) to enter bankruptcy as well. This is not usually the case absent the extraordinary conditions like those exhibitors face today.
There is another possibility, however. The Trump administration has lately been rumbling that they are considering overturning or otherwise unwinding the Paramount Consent Decrees. To that end, the Department of Justice had already opened a review of the 1938 decrees, long before this crisis. As a bit of background, the Paramount Consent Decrees were the result of an antitrust lawsuit filed by the Department of Justice against the (then) major motion picture companies, alleging they had conspired to control the motion picture industry through their ownership of film distribution and exhibition.
At the time, the major studios had, through acquisition and construction (spanning 20 years after the last major cinema shut down during the 1918 Spanish Flu) come to control much of the exhibition industry. In short, the resulting decrees completely reorganized the industry, mandating separation between distribution and exhibition by requiring studios to divest and, going forward, to not own theaters without prior court approval. There were other controls placed on booking practices and pricing as well, but the ownership limitations are the most widely known limitation.
In case you didn’t carefully read that last bit, after the last known widespread cinema closure (during another massive global pandemic), the studios bought up the dramatically weakened exhibitors or built across the street from them, forcing them to close. Now, the Trump administration is considering allowing just this same type of thing to happen again, by potentially overturning the 1938 decrees. Could the financial headwinds faced by the exhibition industry be the push the administration needs to accelerate the unwinding of the decrees?
So in one possible future, one or more of the top 3 global chains reorganize in bankruptcy, closing locations, cramming-down leases, pensions and other financial obligations, and may, possibly have the financial support of the U.S. Government, whether or not the Feds actually take some form of ownership in the chain(s) through direct share ownership, warrants or some other derivative, as is under discussion with the airlines and as was the case with the automakers in the last economic crisis.
In another possible scenario, the Trump Department of Justice could accelerate the review and overturn of the Paramount Consent Decrees, allowing studios to, once again, step into the market and consolidate ownership of exhibition – creating incredibly powerful vertical distribution networks for their content. These exhibition relationships, taken in conjunction with their consolidated digital network distribution strategies, especially those massive interrelated platforms owned/controlled by Comcast/Universal, Disney and Warner/AT&T, would completely reshape the entire future of content. In this world, smaller and independent exhibitors would likely be forced into lower value acquisitions by the behemoths, but only in those markets where the majors don’t already enjoy controlling footprint. Competing independent exhibitors would be blocked by preferential booking and eventually forced out of business, and Hollywood would control every part of the process from development through final consumption and no one, from the development personnel all the way through to the end consumer, would be spared the effects of the voracious appetites of the Hollywood money machine.
These are uncertain times, indeed, and like an epic existential tale spun by Hollywood’s storytellers themselves, the audience hangs in suspense awaiting the ending.
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