Carmike Cinemas and the AMC Entertainment Merger Proposal

Transcription

1 Carmike Cinemas and the AMC Entertainment Merger Proposal An analysis of the merger and explanation of undervaluation in the acquisition price April 13 th, 2016

2 Disclosure These materials have been prepared for public use and may only be disseminated or referred to, in whole or in part, with the prior consent of the administrator of the Maritime Activist Investor (MAI) blog. MAI assumes no responsibility for verification of the information in these materials, and no representation or warranty is made as to the accuracy or completeness of the information. These materials do not contain all information that may be required to evaluate, and do not constitute a recommendation with respect to, any transaction or matter. Any recipient of these materials should conduct their own independent analysis of the matters referred to herein before making any investment transactions. All dollar figures are in USD. Contact Founder.MAI@gmail.com

3 Table of Contents Company Profile 1 Merger Backdrop 1 Proposal Analysis 5 Multiples Valuation 5 Shareholder Actions 7

4 03/15 04/15 05/15 06/15 07/15 08/15 09/15 10/15 11/15 12/15 01/16 02/16 03/16 Volume (M) Carmike Cinemas Inc (NYSE:CKEC) April 13 th, 2016 Company Profile Carmike Cinemas, Inc., (Carmike) is a motion picture exhibitor company. The Company owns and operates theatres and screens. In certain locations, the Company offers a food and beverage menu, including the sale of alcoholic beverages. The Company owns and operates approximately 274 theatres with 2,909 screens located in 41 states. In addition, it has approximately 257 theatres with 1,080 screens (37% of its screens) equipped for three dimensional viewing The Company operates one family entertainment center under the name Hollywood Connection which features a multiplex theatre and other forms of family entertainment. It also operates two Bogart's Bar and Grill Restaurants (Bogart's). Bogart's is a full service restaurant and bar. As of December 31, 2014, the Company operated 45 auditoriums, which operate under the Big D, IMAX and MuviXL names. The Company sells its tickets at its theatre box offices before the start of a film. Enterprise Value Merger Price per Share Common Shares Outstanding 24,595,000 Equity Value 737,850,000 Add Debt 454,699,000 Less Cash - 102,510,000 Enterprise Value 1,090,039,000 LTM EBITDA 135,129,000 Pre-Merger EV/EBITDA 8.07x ($mm) EV/ Market Cap Enterprise Value TTM EBITDA EBITDA FY1 EBITDA FY2 Average 2, , Carmike AMC 2, , Regal 3, , Cinemark 4, , Cineplex 2, , Merger Backdrop On March 3rd, the Board at Carmike Cinemas announced their approval of a $1.1bn deal whereby AMC Entertainment will acquire Carmike in an all-cash transaction to make the largest motion picture exhibitor company in the world. On March 22nd, Mittleman Brothers LLC, an investment management company based out of New York owning then 7.1% of Carmike Cinemas, was publicly against the actions of the Board in the sale to AMC. Mittleman Brothers stated in their 13D Filing that they believe the valuation multiple used in AMC s acquisition of Carmike was far below an appropriate level and there was no reasonable justification for a sale at such a multiple. 1

5 On March 31st, Driehaus Capital Management filed a Schedule 13D stating that, as of March 23rd, they owned 8% of the outstanding common shares of Carmike. The company had began accumulating this position on March 15th, and also owns 1,651 Call option contracts at $30. Driehaus has said that they purchased a large position because they believe that shares were undervalued and that such value can be unlocked by exercising their voting rights with respect to the pending transaction with AMC and/or exercising their statutory right to appraisal. Driehaus had expressed that they believe this merger is a unique opportunity for AMC to gain substantial scale and accrue meaningful strategic benefits from a highly complementary asset. That being said, the fund believes that the deal was not shared equitably. They believe that the company is fairly valued around $ $47.25 per share in this cash-out merger and they want to explore opportunities to properly compensate Carmike shareholders. Following the merger, Power Taylors LLC, The Briscoe Law Firm LLC, The Law Offices of Vincent Wong, and The Law Office of Brodsky & Smith, LLC all stated that they are investigating claims against the Board of Directors at Carmike Cinemas in connection to their sale to AMC Entertainment. It is generally believed that the acquisition price is far too law, being under the 52- week high of $33 and lowest fair price estimate on the Street of around $36. Additionally, it is believed that the Board at Carmike did not adequately shop around to find a deal more in line with their fiduciary responsibility to shareholders. To properly illustrate actions taken by the Board and Management at Carmike and AMC surrounding the Merger Proposal, I compiled the following timeline using Carmike Cinema s amended Annual Proxy Statement filed on March Major events related to the merger, and specifically the actions taken by the Board and Management to act in the interests of shareholders, were included. May Carmike s SVP, Treasurer and CFO met with AMC s CEO and CFO. At this meeting, AMC proposed engaging in discussions regarding a potential transaction in which AMC would consider acquiring Carmike in a cash and stock merger. Later that month, Carmike s senior management discussed this possibility with the Board, whereby it was decided not to continue discussions with AMC s senior management in light of the then pending transaction to acquire Digital Cinema Destinations Corp, referred to by the Company as Digiplex. August Following the closing of the Digiplex transaction in August, Carmike s Board met to discuss the AMC proposal. The Board authorized the Company to enter into a confidentiality agreement with AMC whereby they would provide due diligence to, and continue considering terms of a potential transaction with, AMC. JP Morgan was brought on as Carmike s financial advisor. October Carmike officially hired JP Morgan and entered into a confidentiality agreement with AMC. Throughout the remainder of the year, the two companies discussed many topics. 2

6 December The Board reviewed a list of potential strategic buyers prepared by JP Morgan. This list included five potential parties that would be interested in, and financially capable of, a potential merger. The Board authorized Carmike s management and JP Morgan to solicit interest from such parties regarding a potential transaction. After considering these potential buyers, the Board determined that a sale of Carmike to any of the potential financial buyers was not likely to maximize stockholder value as compared to a potential transaction with AMC or another potential strategic buyer due largely to the amount of leverage required, lack of synergies, and likelihood of not being able to meet required investment returns. January JP Morgan contacted each of the five potential acquirers. Four of the five declined to enter a confidentiality agreement as they did not believe Carmike s business would be a strategic fit for their respective businesses. One party had entered into a confidentiality agreement with Carmike, but eventually decided it was not interested in pursuing the business combination as it was not in line with their strategic priorities. Early AMC offered to acquire Carmike for $37.00 per share with 60% of the acquisition to be paid in cash, and the remaining 40% paid in AMC stock. April After further considerations, AMC informed Carmike that it was no longer interested in pursuing a potential merger. July AMC announced that their President and CEO, Gerry Lopez, was stepping down. December Gary Suter, AMC s SVP - Purchasing & Strategic Initiatives, requested to meet with Dan Ellis, Carmike s SVP, General Counsel and Secretary to discuss the transaction that AMC and Carmike had considered earlier in the year. Carmike also announced a $50m share repurchase program and the Board reviewed and discussed Carmike s December 2015 projections with senior management. AMC announced that its Board of Directors appointed Adam Aron as the CEO of AMC. January Mr Ellis met with Mr Suter and received interest towards a potential transaction in which AMC would acquire Carmike. Carmike s Executive Committee authorized senior management to further discuss a potential transaction with AMC s senior management. AMC suggested a transaction to acquire Carmike for a purchase price of $26.00 per share, again through the use of cash and AMC common stock. After discussions with Carmike s senior management, who had noted the previous acquisition offer of $37.00 per share, AMC proposed a purchase price in the range of $26.00 to $ Carmike s senior management did not agree to any transaction terms and later informed the Carmike Board about the proposal. The Executive Committee gave authorization for senior management to enter into an extension to their confidentiality agreement with AMC and to provide AMC with further diligence material. February Mr Aron contacted Mr Passman, the CEO of Carmike, and proposed a purchase price in the range of $28.00 to $29.00 per share. Later that week, Carmike s senior management continued to discuss a potential transaction with AMC s senior management. 3

7 February AMC offered an acquisition price of $30.00 per share in an all cash transaction. Mr Aron noted that this proposed purchase price of $30.00 per share may be slightly reduced by AMC following further discussions with their Board. February Carmike s Board held a special meeting where they were joined by senior management, JP Morgan, and their outside legal counsel King & Spalding. The Board discussed the proposal and instructed JP Morgan to prepare a list of other potential buyers that would likely be interested in a transaction with Carmike. King & Spalding drafted and proposed a merger agreement to AMC s counsel. February Carmike s Board held another special meeting where they discussed the financial terms of the offer from AMC and reviewed the Company s performance during the fourth quarter of They noted that the February 2016 projections were different from the prior 2015 projections as the newest projections were affected by lower expectations of theatre acquisition activity. Again, they discussed with JP Morgan potential strategic or financial buyers who would likely be interested in a business combination with Carmike. JP Morgan noted that potential non-us strategic buyers were unlikely to be interested in an acquisition of Carmike given their other priorities and the challenges presented by current exchange rates. The Board instructed JP Morgan to contact the two US based parties for potentially acquiring Carmike. The Board also determined that other inquiries from financial sponsors at a recent Industry conference, as well any deal with other industry participants, were not likely to maximize stockholder value as compared to a potential transaction with AMC or another similar potential strategic buyer. Neither of the parties contacted by JP Morgan, including one which the Board approved an extension of a confidentiality agreement with, thought the possibility of a transaction with Carmike was in their best interest. February AMC reduced their proposed purchase price of Carmike from $30.00 to $ March Carmike s Board held a special meeting with senior management, JP Morgan and King & Spalding. The Board and other members discussed all the duties and implications proposed in the terms of the transaction with AMC. Additionally, the Board also discussed potential opportunities available to the Company such as theatre acquisition strategy, expansion of intheatre dining, remodeling of theatres, luxury reseating and expanded concession offerings. As a part of this review, they also considered the costs and risks associated with such initiatives, resources and positioning relative to larger competitors, as well as the uncertainties inherent in its new development and a continued theater acquisition strategy. They also discussed employee severance and retention benefits to Carmike employees in connection with the transaction. Following further discussion by the Board, accompanied by JP Morgan and senior management, the Board instructed senior management to contact AMC s senior management to propose a purchase price of $30.00 per share. AMC agreed to increase the purchase price to $30.00 per share. Later on the 3rd of March, the parties issued a press release announcing the transaction. 4

8 Proposal Analysis The Board at Carmike had, on multiple occasions, attempted to solicit interest from potential buyers. The analysis of potential buyers included a total of five companies, two of which were non- US. JP Morgan had approached these companies, but ultimately received no material interest. The Board considered inquiries from industry participants that recently showed interest as well as the possibility of approaching other industry participants, but ultimately decided that shareholders would see a greater benefit from a merger with AMC. Unfortunately to Carmike shareholders, the Board did not receive any other offers and therefore could not truly determine that $30 per share would maximize shareholder return. To illustrate the size of the sale that AMC is set to receive, I ll consider the following comparable analysis of what a fair multiple would be. Valuation Analysis The following analysis of four comparable theatre acquisition deals is built off a foundation laid by Mittleman Brothersin a 13D Filing dated March 21, I want to thank Mittleman Brothers for taking action and educating shareholders. Through this report, I hope to achieve the very same ideal. June China-based Dalian Wanda, the mother company of AMC Entertainment, acquired Hoyt, the second largest movie theatre company in Australia, for $777m. Wanda had paid a pre-merger multiple of 10.9x Hoyts $71.4m in EBITDA. September Vue Entertainment, based in London, was acquired by OMERS Private Equity and the Alberta Investment Management Corp for $1.46 billion. This investment partnership paid 8.5x Vue s $171m in EBITDA. The nature of this acquisition created no synergies for the acquiring investment partnership, meaning this multiple also represents their post-synergy effective cost. May Dalian Wanda completed a $2.75 billion buyout of AMC, a pre-merger multiple of 7.5x AMC s 2012 EBITDA of $368m. This deal was when AMC over highly levered, with 5.4x net debt/ebitda, and after rating agency downgrades on their debt. The then-private AMC was held by multiple private equity funds who had failed twice in attempts to IPO in 2008 and The bottom line here is that AMC was under pressure to sell, and likely had to accept a relatively low price from Dalian Wanda. As Mittleman mentioned in their letter to the CEO and Board at Carmike, the Company is under no such pressure to sell at an unfavorable price. Additionally, Carmike s net debt/ebitda is only at 2.6x. As Dalian Wanda had no US operations, this multiple of 7.5x EBITDA can be considered post-synergy. October Cinemark Holdings acquired Century Theatres for $1.04b, a multiple of 8.6x Century s $121m in EBITDA. This is an old deal, however Carmike did use it for their multiple justification and thus I included it as well. 5

9 The chart to the right shows my calculation for Carmike s EV at $30 per share, which implies an acquisition multiple of 8.07x T12M EBITDA. Enterprise Value In a March 10th filing, Carmike adjusted their EBITDA figure to $126m to account for M&A expenses and non-cash stock-based compensation expenses related to the merger, which would create the appearance of an 8.65x acquisition multiple and allowed the Company to say that the multiple is higher than any comparable, large-scale theatre transaction multiple over the last 10 years. As this newly adjusted EBITDA figure is so dramatically different from the reported Merger Price per Share Common Shares Outstanding 24,595,000 Equity Value 737,850,000 Add Debt 454,699,000 Less Cash - 102,510,000 Enterprise Value 1,090,039,000 LTM EBITDA 135,129,000 Pre-Merger EV/EBITDA 8.07x figure, which props up the acquisition multiple and doesn t truly line up with industry peers and common practices, I m going to stick with the original EBITDA figure of $135.1m as reported in their February 29th press release. It is also very important to consider the fact that the acquisition valuation does not include the value behind Carmike s 18% ownership in Screenvision, which is the second largest pre-movie advertising firm in the US. In 2014, National CineMedia, the largest player in that space, offered to acquire Screenvision for $375m. The deal was abandoned as the Department of Justice had raised antitrust concerns. Screenvision reported a sales increase of 4.6% in 2015 along with a total of $20m in net debt. In an attempt to be more conservative than Mittleman Brothers estimate of $275m, I am going to say that Screenvision has an EV of around $265m. This is a significant discount to the $375m offered by CineMedia as there are likely no other companies with the synergistic capabilities than the largest player in the industry. This is also a discount compared to Mittleman s estimate as I want to fully consider the possibility of CineMedia becoming more valuable by either 1) going for smaller players in the industry and consolidating or 2) shifting strategic focus to a more organic growth approach to gaining market share. A more valuable CineMedia means a tougher landscape for Screenvision to grow their EV. Taking away $20m in net debt, this now leaves an equity value of $245m, valuing Carmike s 18% stake at $44.1m, or roughly $1.80 per share. Finally, taking an average acquisition multiple from the four previously mentioned deals, I assume that Carmike could have gotten a multiple of 8.875x, which very conservatively considers the tremendous synergistic benefits AMC will see post-merger that weren t even marginally realized in three of the mentioned deals. (USD$m) Acquirer Target EV EBITDA Multiple Dalian Wanda Hoyt OMERS, AIMC Vue Entertainment 1, Dalian Wanda AMC Entertainment 2, Cinemark Holdings Century Theatres 1, Average 8.87 At this multiple, Carmike would be valued at $34.50 per share. Considering the Company s Screenvision value, which Shareholders surely have the right to benefit from, the acquisition price could easily be justified at $ That s a 21% premium over the current $30 acquisition offer and leaves $154,948,500 on the table for the owners of Carmike s common stock. 6

10 Shareholder Actions During the annual shareholder s meeting held in May, shareholders will vote for or against proposal (1) the Merger Proposal. A majority vote against the merger would result in a blocking of the transaction with AMC. A majority vote for the merger would be the final approval stage before regulatory approval. Under Section 262 of the DGCL, stockholders of Carmike Cinemas are entitled to exercise appraisal rights with respect to the merger to seek a determination for the fair value of their shares by a court of competent jurisdiction. This court valuation would value Carmike Cinemas at a fair value using those projections less susceptible to interpretation and as if Carmike was not participating in this transaction with AMC. If holders representing 20% or more of Carmike s shares have exercised their appraisal rights in accordance with Delaware law, then AMC has the right to not complete the merger. Given that a shareholder formally requests an appraisal, that shareholder will have the right to receive payment of the fair value of their shares of Carmike as determined by the Delaware Court of Chancery, given the shareholder satisfies the following criteria; Vote against the merger proposal, hold their shares continuously through the effective time of the merger, do not submit their shares for payment of the merger consideration, and otherwise comply with the statutory procedures and requirements set forth in Section 262 of the DGCL. If a shareholder is against the merger, they are encouraged to vote against the Merger Proposal at the annual meeting. If a shareholder believes the acquisition price of Carmike Cinemas is not fair, they are encouraged to exercise their appraisal rights, vote against the merger, and hold onto their shares through the effective time of the merger. Given that an appraisal valuation does not occur and shareholders vote in majority against the merger proposal, the company would likely drop in value by a considerable amount. Carmike would have incurred large transaction and opportunity costs attempting to complete the merger, could lose business partners and employees, may be subject to business disruption and decline, and would have lost a considerable amount of time that could have been spent focusing on other strategic initiatives such as growth through theatre acquisition and new theatre developments. That being said, Carmike has proven their operational capabilities over the past several years and has improved their financial performance in a consistent and sustainable manner. Given the real possibility of continuing this growth in performance, I would have to argue that the merger is not the only effective approach to building long term value. If the merger between Carmike and AMC were to not go through, the Company's continuation of theatre acquisition activities, focus on operational efficiency, and commitment to new theatre developments would benefit shareholders in the future just like it has in the past. Given that an appraisal valuation does not occur, and that shareholders vote in majority for the merger proposal, Carmike will be delisted and holders of their common stock would receive $30.00 per share. JP Morgan would have already been paid a fee of $1.5m, and would receive an additional $10.7m upon the closure of the merger. 7

11 Disclosure These materials have been prepared for public use and may only be disseminated or referred to, in whole or in part, with the prior consent of the administrator of the Maritime Activist Investor (MAI) blog. MAI assumes no responsibility for verification of the information in these materials, and no representation or warranty is made as to the accuracy or completeness of the information. These materials do not contain all information that may be required to evaluate, and do not constitute a recommendation with respect to, any transaction or matter. Any recipient of these materials should conduct their own independent analysis of the matters referred to herein before making any investment transactions. All dollar figures are in USD. Contact Founder.MAI@gmail.com