The movie business appears to have come back in a big way this summer. Theater owners are having their best summer in years, driven in large part by the blockbuster success of Barbie, which as of mid-August had become the highest grossing movie in Warner Brothers’ 100-year history with box office sales of more than $567 million and counting. Other big attractions included Oppenheimer with gross sales of $285 million domestically and even bigger numbers overseas, as well as the latest entries in the Mission: Impossible and Fast and Furious franchises. The evidence would suggest that given a good enough reason people are willing to leave the house and enjoy an exciting film on the big screen.
That resurgence could be good news for several companies that have gone through the hard times of bankruptcy in the last few years. One of the more interesting and dramatic of these is National CineMedia which is now coming out on the other side of a Chapter 11 bankruptcy filing it made in April.
The company operates a cinema advertising network which is familiar to anyone sitting through the pre-show ads, trivia and other content that precedes the trailers that precede the showing of feature films. It also has advertising screens in high traffic areas of movie theatres that are uniquely positioned between major consumer goods companies and theatre owners. It looks like a great business model—as long as the movie theatre seats are filled.
National Cinemedia (“NCMI”) launched as a joint venture formed by the three largest movie theater chains—Regal Cinemas (50%), AMC (29.3%), and Cinemark (20.7%) in 2005, to create a new revenue stream via a national in-theater advertising program. NCMI contributed to the bottom lines of all three founding members, but each also faced its own challenges that were further exacerbated by the Covid pandemic and forced the shuttering of many theaters around the country.
Cineworld, the second-largest theater chain globally and the parent of Regal Cinemas made its own Chapter 11 filing in September 2022, emerging from bankruptcy just last month. In making the announcement, the company noted it had reduced its debt load by more than $4.5 billion and secured new debt financing of $1.71 billion and $800 million in new equity capital.
AMC Entertainment was on the verge of bankruptcy due to Covid as well when it became a favorite of the meme stock crowd and managed to hold on. That company engaged in multiple rounds of dilutive secondary stock sales as its stock rallied with the meme stock mania. But AMC is not out of the woods yet, with the CEO warning shareholders in July that the company stands to run out of money in the next year or so without an additional infusion of equity capital.
The third partner, Cinemark appears to have been the least troubled of National Cinemedia’s founding partners. It recently announced a quarterly profit of $120.4 million vs. a loss of $73.4 million a year earlier. Pre-EBITDA adjusted earnings climbed to $231.5 million, more than $93 million higher than the previous year.
The announcement of those earnings and of National Cinemedia’s emergence from bankruptcy immediately gave the stock prices of both firms an immediate boost. In NCMI’s case, the good news was its ability engineer a restructuring agreement with its lenders which allowed it to eliminate approximately $1.2 billion of debt and secure $55 million of new exit financing to fund operations and growth initiatives.
NCMI has come out on the other side of bankruptcy and, although it was accomplished in only a few months, it wasn’t a smooth journey. There was considerably heated litigation regarding how the NCMI bankruptcy would affect the three founding partners and whether their equity investment would be wiped out. They were threatening to liquidate the whole operation if they didn’t get a better deal and seriously considered looking for someone else to provide their in-house advertising. For NCMI, the most difficult negotiation was with Regal due to its own bankruptcy proceedings where it had the leverage to reject NCMI’s contract with far less consequences than if it wasn’t operating under Chapter 11.
In the end, NCMI’s management, who will remain in charge of the restructured company, called their bluff and ultimately all parties were able to strike an acceptable deal. The three partners got ~9% of the new equity but also secured significantly higher theatre access fees and revenue shares from NCMI. Separately, secured creditors wound up with ~86% of the new equity. This lucrative partnership generated impressive, steady cash flows for over a decade prior to Covid decimating the movie theater industry. NCMI emerged from restructuring with a new board of directors, bringing extensive advertising, financial, media, technology, and digital experience to the venture.
After eliminating so much of its debt, NCMI is now well-positioned for future growth if the audience numbers realized this summer continue to hold. According to its most recent investor presentation, the company captures more than 70% of the market across the top ten demographic market areas (DMAs). Its current contracts with the three largest theater chains have between 10-18 years remaining and cover more than 18,000 screens in over 1,400 theaters.
The big question is whether the summer resurgence is sustainable. Several of the movies released earlier this year drew audiences but not at the level their studios had predicted and certainly not close to the Barbenheimer phenomenon. It remains to be seen if the studios can produce movies that will get people out of the house and into theaters but, if so, NCMI has a highly captive audience for its product. Certainly, the longer the strike by writers and actors against the studios continues the more likely it is that movie theater operators will have to absorb another hit as premium content dries up.
The movie theater comeback is also heavily impacted by the secular change in consumer viewing habits. With so many streaming platforms offering recently released films that one can enjoy at home on large screen TVs with the whole family for little more than the cost of a single ticket in a theater, it takes a lot to draw an audience these days.
But if movie attendance continues to surprise on the upside and return to pre-covid levels, the re-issued NCMI stock could outperform. However, it all depends on giving consumers a reason to go out and spend money. If they do, that could be good for consumers and NCMI’s new shareholders.
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