Raising the curtain on further consolidation in the movie-theater industry, AMC Entertainment Inc. and Loews Cineplex Entertainment Corp. said Wednesday that they might combine their businesses, a transaction that would create the nation's largest chain.
The companies did not provide any details of the talks, cautioning that they were preliminary and might not result in a deal.
The announcement is another sign that the theater business has recovered from its hangover after a pricey buildup of multiplexes in the 1990s resulted in numerous bankruptcy filings, analysts said Wednesday.
"The industry has picked itself back up from the dirt, and it is now on its way to stability," said Leland Westerfield, a media analyst with Jefferies Research in New York. "It's regaining the noncyclical kind of growth that the industry experienced in past decades."
An AMC-Loews marriage, if consummated, would create a company with revenue of $2.6 billion and more than 6,300 screens at 513 theaters. It would surpass Colorado--based Regal Entertainment Group. That chain, currently the nation's largest, had revenue last year of $2.1 billion from 6,119 screens at 562 theaters under the Regal, United Artists and Edwards cinema flags.
In Southern California, AMC has 327 screens at 22 theaters. Loews has 77 screens at eight theaters; Regal, 600 screens at more than 60 complexes.
Officials at AMC and Toronto-based Onex Corp., which owns the Loews chain, declined to comment beyond similarly worded statements issued before the markets closed. AMC shares rose 25 cents, or 1.8%, to $14.30, in American Stock Exchange trading. Onex shares rose 3.7% on the Toronto Stock Exchange.
Industry experts speculated that Kansas City, Mo.-based AMC, by far the larger of the two theater operators, would be the controlling partner in any deal with Loews.
The fortunes of AMC, one of the few major theater chains that avoided bankruptcy protection in recent years, reflect the industry's improving outlook. After losing money for six straight years, the company has been profitable in three of the past four quarters. Along with Oaktree Capital, a Los Angeles investment firm, Onex bought Loews chain out of Bankruptcy Court in 2001.
Regal, by comparison, reported a profit of $117.2 million on sales of $2.1 billion last year. Denver billionaire Philip Anschutz stitched the company together by scooping up Regal, United Artists Theatre Co. and the Orange County-based Edwards Theatre Co. for bargain prices as those companies emerged from U.S. Bankruptcy Court protection. Anschutz took Regal public in May 2002.
An AMC-Loews deal could spark similar deals among the nation's small and mid-sized theater chains, analysts said.
"This is a business that will continue to consolidate," said Matthew Harrigan, managing director of Janco Partners, a Colorado investment banking firm. "It's a very durable business. Theater revenues have held up over the years, and if you go to London or Los Angeles in 15 years, you probably won't see a Blockbuster Video or a Hollywood Video store, but you'll see plenty of theaters."
For Hollywood studios, which negotiate splits of box-office revenue with the theater chains, an AMC-Loews combination could mean a loss of leverage. While studios might be willing to cut more favorable deals to a bigger AMC-Loews chain, analysts don't expect the equation to change much.
"Everyone in the entertainment business is getting bigger and there really isn't the ability to push people around," said Harrigan, who follows AMC.
One of the key drivers behind the deal is probably the growing business of on-screen advertisements shown during the trailers, experts speculated.
Currently a $250 million-a-year side business, on-screen advertising could swell to a $1-billion annual bonanza in the coming years, experts said. A company with national reach could extract lucrative deals with advertisers who want to pitch free-spending moviegoers, particularly as younger audiences appear to be turning away from network television, which has long been the preferred medium for advertisers.
An AMC-Loews combination also would benefit from economies of scale, being able to buy larger quantities of items including new seats, ticket-taker uniforms and popcorn. The deal could lead to the closure of unprofitable or overlapping theaters.
"By [combining] rather than building more theaters, AMC would be at once gaining scale without repeating the overbuilding mistakes of the 1990s," said Jefferies analyst Westerfield.
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Companies at a glance
Here's a look at AMC Entertainment and Loews Cineplex Entertainment, which say they are in talks about a merger.
Headquarters: Kansas City, Mo.
Owners: Publicly traded since 1983
Attendance (fiscal 2003): 198 mil-lion
Theater locations: United States, Canada, France, Hong Kong, Japan, Portugal, Spain, Sweden and Britain
Top officer: Chairman, CEO Peter C. Brown
Fiscal 2003 revenue (year ended April 3): $1.8 billion
2002 revenue: $1.3 billion
Headquarters: New York
Founded: 1998, from merger of Loews Theatres and Cineplex Odeon Corp.
Owners: Onex Corp. and Oaktree Capital Management
Attendance: Not available
Theater locations: United States, Canada, Mexico and partnerships in Spain and South Korea
Top officer: President, CEO Travis Reid, Loews Cineplex Theatres
2002 revenue: $856.2 million
2001 revenue: $903.5 million
Sources: Company reports, Hoover's