With Exhibition On The Brink, Paramount Decree Topples, A Symbolic Thumb In The Eye

A court ruling that dropped today allowing movie studios to buy theaters (whether or not they want to — and they probably don’t) is the latest snub to an industry that’s been rattled by change for years, in particular since March and COVID-19.

Exhibition hasn’t been this pressured in a century. When the 1918 Spanish Flu shuttered theaters, many permanently, studios saw an opportunity and snapped them up, ruling the business until the Paramount Decrees in 1948 broke them up. More than 70 years later, it’s no surprise the law is toast. The landscape is very different and a handful of Hollywood majors including Disney and new royalty like Netflix and Amazon were exempt from it anyway.

But it’s ironic that the ruling – by U.S. District Judge Analisa Torres of the Southern District of New York — hit as the nation endures another massive health crisis that’s squeezing exhibition. PVOD is arguably tipping the balance toward studios as Wall Street and big credit ratings agencies struggle to assess milestones like AMC’s deal with Universal and Disney’s decision to release Mulan directly to Disney+.

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What’s clear is that this time around studios are not sweeping in to buy the distressed assets. Sources tell Deadline that major movie studios have no plans to get in the exhibition. With their focus on streaming – including big streaming-focused restructurings this week alone at NBCUniversal and Warner Bros — they prefer to spend billions building up their own services than worrying about the local staffing, leases, property taxes and city ordinances that come with running a theater. Also, let’s not forget that many have already been there and done that — i.e. Warner Bros. with cinemas it used to own abroad, and Sony with Loews in the mid-1990s.

At least one big chain, AMC Entertainment, may consider its own asset sales if things continue to go south, its CEO said yesterday.

Netflix and Amazon are the lone strategic buyers rumored on and off to be interested in buying a chain. Netflix bought the Egyptian in Hollywood and the Paris in New York City. But those were largely vanity plays. Sources at Netflix have insisted the streamer would never jump into the the circuit business because it’s great at what it does and doesn’t need that exposure to an ancillary risk.

Still, AMC Entertainment led theater shares higher Friday as some speculated that they group could become acquisition targets.

In Friday’s trading, AMC stock rose ($4.75, +14.7%), Cinemark was up too ($11.06, +5.3%), as Marcus ($13.47, +6.57%), Imax ($11.86, +3.3%) and National CineMedia ($2.97, +2.4%)

The ruling came as S&P warned that AMC needs the stars to align just right this pandemic to avoid another cash crunch. The nation’s largest chain reported largely irrelevant second quarter financials yesterday with nearly no revenue. But executives were upbeat on the pace of international theater openings. They offered some details – not enough, because they’re confidential — of the Universal deal, and an overview of the chain’s reinforced cash position that they say can carry it into 2012 even if theaters stay closed.

“We’ve survived coronavirus,” said CEO Adam Aron.

No so fast, others said.

“AMC’s risk profile remains very high with a still-elevated level of debt and a questionable FCF [free cash flow] outlook,” according to analyst Eric Handler of MKM Partners.

If the chain has to delay its U.S. reopening beyond the current third quarter, said S&P, it “will likely need to secure additional capital to cover its cash burn or risk running out of cash before ramping up to operating at a profitable level.” AMC has enough cash to remain closed for another seven to eight months and untapped borrowing capacity of $100 million,” it said. After that, it “may be forced to rely on asset sales or equity raises.”

Aron, during a Q&A on the call yesterday, said international asset sales were a possibility set out in covenants from its just completed debt restructuring.

“Yes … there are opportunities to sell assets. We’re allowed to do that. There are certain restrictions on the cash flows from those asset sales in terms of what percentage goes to repay debt and what percentage stays in the company. But we do have the ability to sell some assets, and we do have the ability to keep some of the proceeds,” he said.

As AMC plans to open rest of its overseas theaters and its U.S. locations this month, it’s got to hope studios won’t continue to delay films if the pandemic doesn’t abate and that attendance will be respectable despite health concerns. The same goes for other chains.

AMC on the call touted its Universal deal but analysts said it may not have much impact unless other chains follow. Regal has come out against the pact and Cinemark seems uninterested. AMC has about 25% of the market. Warner Bros. has been rumored to be looking for their own crunched windows-PVOD or streaming pact with big exhibition.

“Currently, Universal would have to forgo releasing a film in roughly 75% of U.S. screens” to use this flexible window, Handler noted. He and others also want to know how and how much Universal has agreed to compensate AMC.

S&P, meanwhile, sees a real potential threat in Walt Disney’s plan to release Mulan directly to PVOD on its Disney+ in the U.S. instead of waiting for theaters to open.

“Disney has been very clear that Mulan is a one-time event but …If Mulan has a successful PVOD launch, it could embolden Disney and other studios to bypass the theaters and increasingly distribute larger films directly to PVOD. We would view this scenario as a fundamental change to the competitive position of theaters.”

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