AMC and Loews to Merge as Consolidation Continues

Theater chains AMC Entertainment Inc. and Loews Cineplex Entertainment Corp. are planning to combine to create the nation’s second-largest theater chain as the ailing movie exhibition business continues to consolidate.

The proposed merger, announced Tuesday, comes amid a box-office slump and an abundance of screens hampering the industry. In addition, analysts contend, film fans are increasingly showing a preference for watching movies at home on DVD. Moviegoers, they note, are balking at rising ticket and concessions prices as well as at the increased number of in-theater commercials that chains depend on to generate revenue.

As a result, most of the top five exhibitors have faced flat or declining income in the last two years.

“It’s getting tougher for theater owners,” said Michael Savner, an analyst with Banc of America Securities.

Based in Kansas City, Mo., the new company, which would keep the AMC name, would boast about 450 theaters with 5,900 screens, putting it a shade behind the 6,273 screens of industry leader Regal Entertainment Group, controlled by billionaire Philip Anschutz. Both AMC and Loews Cineplex are privately held, and no value was given for the deal, although they have been valued in the past at nearly $4 billion combined. The two companies previously discussed merging but ended talks in early 2004.

AMC spokeswoman Pam Blase said Tuesday’s deal showed faith in the industry’s future. “We believe very strongly that moviegoing is something that will be a preferred form of entertainment,” she said, “and this merger speaks to that.”

Analysts and industry executives predict more mergers, noting that about 55% of the 35,000 screens in the U.S. are held among smaller companies. Exhibitors are under pressure to find new ways to cut costs and new sources of revenue such as in-theater advertising, which many moviegoers find annoying.

“I think the exhibition business is at a crossroads,” said Paul del Rossi, former chief executive of General Cinemas, which filed for bankruptcy protection four years ago before being bought by AMC. “The major players in the exhibition business are now controlled by venture capitalists, and they have different long-term views than traditional theater owners.”

Although the industry isn’t facing the dire situation it did in the 1990s, when a glut of theaters forced several exhibitors to file for bankruptcy protection, business has slowed for the big companies, helping to fuel the current consolidation wave. AMC, for example, reported a $10.7-million loss last year.

Other recent deals include last week’s acquisition by Canadian theater chain Cineplex Galaxy of Viacom Inc.’s Famous Players, a move that gives the consolidated company 60% of the Canadian market. Century Theatres in Northern California this year was reported to have hired an investment bank to find a buyer.

Consolidation benefits theater chains by lowering their administrative and supply costs, and also by potentially giving larger chains more leverage to negotiate better “film terms” with the studios. Currently, studios keep 60% to 70% of a movie’s first-weekend gross. With the DVD release timeframe shrinking from six months to as little as three months for most movies, mergers also could put theaters in a better position to push for DVDs to be released later.

John Fithian, president of the National Assn. of Theatre Owners, a trade organization that represents the majority of U.S. exhibitors, said the exhibition industry was fundamentally sound but currently in a bad cycle.

“We are not having a great year, but we have been in this position before,” Fithian said. “When the quality and the quantity of the movies come back, our patrons will come back to see them. The sky is not falling.”

Box-office sales are down 7% to date this year, and admissions are on track to fall for the third straight year.

The deal between AMC and Loews, which is subject to regulatory approval, was orchestrated by separate private investment firms that bought each company last year.

J.P. Morgan Partners and Apollo Management paid $2 billion for Kansas City, Mo.-based AMC. Bain Capital, Carlyle Group and Spectrum Equity Investors bought New York-based Loews for $1.46 billion.

Under the deal, J.P. Morgan and Apollo would own 60% of the new business. The Bain group would own 40%, the companies said Tuesday.

Well-heeled investors have targeted theater chains, aiming to make money by trimming unprofitable locations and improving finances. Many view as a model what Anschutz did in cobbling together a group of struggling chains into what is now the nation’s leading exhibitor.

But Wall Street analysts note that theater owners still face increased competition for the entertainment dollar not only from DVDs but also pay per view, the Internet and video games. Although domestic box-office receipts for studios constitute less than 30% of total revenue, for theater owners admissions drive their business. Given the industry’s already slim margins, owners increasingly must pinch pennies.

“It used to be called a ma-and-pa business,” said Tom Sherak, a partner at Revolution Studios and the former distribution chief for 20th Century Fox.

“It watches nickels and dimes. That is how they exist. They are not like studios who spend $150 million on one movie.”

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Biggest cinema chains

Largest U.S.-based theater chains in terms of the number of screens worldwide

Regal Entertainment: 6,273

AMC Entertainment*: 5,900

Cinemark USA: 3,254

Carmike Cinemas: 2,187

National Amusements: 1,390

*AMC and Loews

Source: Company reports