Disney and AMC Will Happen – Ban Redemption DD
How about a Ban Redemption DD for you autists. Disney REQUIRES movie theaters and there is 0% chance they allow AMC to go under. Disney revenues could see a decline of nearly $300 million per tentpole if they plan on going PVOD (paid-video-on-demand) only with Disney+ subscribers versus movie theater release.
Disney Tentpole Releases
In 2019, Disney released eight major tentpoles with an average of $1.4 billion in revenue ($1.2 billion median revenue). If you take into consideration production and marketing costs, along with revenue share with distributors such as AMC and Cinemark, you’re looking at a net revenue of around $250-300 million. How does the math work? (rounded to nearest $100MM):
AVG tentpole revenue: $1.4 billion
AVG revenue share (@ 50%): -$700MM
AVG production cost: -$200MM
AVG marketing cost: -$200MM
AVG net revenue: $300MM
With an acquisition of the theater itself, you have embedded advertising within the theater for upcoming releases and more importantly, the revenue sharing would be wiped for AMC (which holds approximately 50% of attendees). The reduction of costs (cinema advertising, TV advertising, online advertising, etc.) would be dramatically reduced, likely around 20-25% given free media inventory, including email and elsewhere, could be used to supplement. The big savings comes from the revenue share reduction. Here is the breakdown of the savings if acquired:
Revenue share savings (@50% share): $350MM
Marketing cost savings: $50-75MM
Disney is expected to expand releases at a level of 10+ tentpoles per year across the entire seasonal cycle, with summer and holiday season being the predominant timeline. This level will likely not be reduced as Disney is in content creation mode which allows movie production to coincide with series production in order to consolidate production budgets (think Wandavision with Marvel and Mandalorian with Star Wars). These synergies will greatly reduce production costs going forward, but only if revenues will support. Disney+ content will likely not be net positive until some point in 2023-24. The net return moving positive will be realized due to pricing expansion as they are giving things away to further build their subscription moat.
Why are theaters imperative? Mulan will likely show a revenue total across Disney+ in the $55-60 million range. Assuming we see the same revenue curve of traditional theater revenue, their first weekend of $35 million will likely net to be 60% of total revenue (revenue data for movies). With barely breaking $65 million in the box office, Disney likely left $600-800 million on the table had the pandemic not hit.
Additional Revenue Sources
Now here is where the other big element comes in that will have some speculative math. I wanted to add this in order to convey the possible revenue streams to come from this. We can take a look at 2019 levels to work against. Here are the numbers:
2019 AMC attendee levels: 356MM (taken from the 2019 annual report)
Unique visitors: 71MM (assuming a five movies-per-year)
One thing to note about people who visit theaters is their propensity for entertainment consumption and travel are higher than other individuals. What this means is that these people are more likely to be ones who go to Orlando or California to visit Disney parks versus other people. They are more likely to go to a restaurant and spend their discretionary money on experience. Cross-promotion of this audience with loyalty, Disney+ subscription, Disney annual passholder and other discount potential would allow further capitalization opportunities. Additionally, the creation of a brick-and-mortar Disney store within theater itself would allow for product purchase to an audience already showing demand for the IP they are going to see (think of Gamestop toys in an AMC “GME Gang 4 Life!”). Queue speculative math:
New Disney+ subscribers annual revenue: $100MM (@2% unique visitors joining annually)
Disney store (in theater) revenue: ??
Lease renegotiation/additional synergy savings: ??
Disney park/passholder revenue: $50-75MM (@2% of unique visitors with average visitor spend at parks)
Advertising reduction: $25-50MM (based on a 10-20% reduction of current ad spending around $280MM for parks)
Total additional revenue and savings: $175-250MM
Internal Rate of Return (IRR)
This MFer is important. The corporate overlords have to find ways to spend their money the best way possible. They decide if content creation, capital expense with parks, etc will net the most in returns given opportunity cost. Within my own company and friends’ companies across the CPG/Media/Technology sectors, I am seeing anywhere between 8-15% IRRs. In other words, Disney needs to make that back with any capital expense, be it an acquisition or within their current assets. The return timeframe is anywhere from 2-3 years, especially in this environment since the concern of inflation in the next 3-5 years may push that IRR number up. Simple math, lets look at a 10% IRR in these calculations:
Current AMC market cap: ~$385MM
Current AMC debt obligations annually: ~2-2.5 billion
Market Cap high (October 2018: $2.1 billion
While looking at a market cap high with a production company purchasing the assets is likely not truly a like-for-like view, understanding what potential savings that Disney would see if they purchased the AMC assets and capitalized on the savings noted above, we can assume this conservative savings level:
Tentpole savings (@ 10 per year): $4.5 billion
Additional revenue/savings: $175-250MM
Minus debt obligations: $2-2.5 billion
Net revenue gains: $2.675-2.75 billion
Finally, if we look at a 3-year window for the IRR assumption, we take the net revenue and minus the initial acquisition cost. We would not want to go down to the bottom of the IRR, but have the float be considerably higher versus the IRR minimum assumption of 10%:
2-year revenue gains: $5.35-5.5 billion + acquisition cost
Acquisition assumption: $2-2.5 billion, but likely even as high as $3 billion
Market cap range stock price: $12.50-15.50
Headwinds and Entry Point
Wow, stock price gains from $2.40 to $12.50 sounds wonderful, but I would preface to say that the next three months are going to be a rollercoaster. There are two major events that could be a catalyst lower:
1) share dilution due to an offering of 100MM shares (as about 55MM have been added of the 150MM that was noted in previous disclosures)
2) bankruptcy due to cash burn. If AMC does dilute further, we could see a 40% reduction from these levels. If bankruptcy happens, then it’s game over.
What does this mean? Entry point for me is some point in late winter, in and around the last week in February or early March. I would definitely wait until January is over to see what happens. It may be as late as April, but you may miss the bottom at that point. This isn’t financial advice, but no one ever picks the absolute bottom.
Do I buy shares or options? I would expect the stock price to creep below $2 over the coming months and think to enter between $1.50-2.00. There may be some crazy options available in the $3-5 range that look to be FD level, but may as well take on the stock side at those levels. If you do get into the options side, expect cheap leaps depending on bankruptcy news (as they are cheap right now anyways). Just understand it is a risky bet. After reading the archived u/Deepfuckingvalue post, I would think this may be one of those stories. The reason I don’t think this will be a Hertz-level bankruptcy is due to the dependency of the media companies.
As mentioned with a possible dilution, the market cap range for the stock gets reduced 40% ($7.50-9.25 give-or-take).
While this is speculation, the two additional drivers for this event would be as follows:
1) Cinemark is eyeing AMC assets and Disney would not want Cinemark to have more control which could pressure revenue sharing
2) Regulatory concern over monopoly power would likely fall to the wayside due to the level of financial distress AMC is under and concerns over job loss and recovery concerns
The AMC assets are strong given the revenue they do currently generate. With a cost-cutter like Bob Chapek in charge of reversing AMCs course to sustained profitability being a win-win for AMC and Disney, this would fit in well with the Disney properties.
I welcome your brutal thoughts as I put on my helmet (the one with my name on it).
TLDR: If AMC isn't delisted by April, Disney will likely buy them. Look for an entry point under $2 in late winter if they haven't filed for bankruptcy (not financial advice)!
Positions: GME, PLTR (to the moon!!!!!! 🚀 🚀 🚀 🚀 🚀 🚀 🚀 ) AMC in March if they're still around.
Submitted December 29, 2020 at 07:38PM by spaceminion
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