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Studios keep delaying blockbuster movies as situation for theater chains worsens: Analyst

Movie theater chains continue to struggle during the Covid-19 pandemic. Macquarie Securities Managing Director and Equity Analyst Chad Beynon joins Yahoo Finance to weigh in on the outlook for theater chains like AMC and Cinemark.

Video Transcript


ZACK GUZMAN: Welcome back to Yahoo Finance Live. I want to spotlight the action we're seeing play out in AMC, the largest theater chain here in the US. Because it would seem desperate times are calling for desperate measures. The theater chain announced plans to let people rent out private theater rentals that are starting at $99 in approximately 600 theaters nationwide.

It's an interesting move after we've seen shares in AMC jump 42% post that vaccine update from Pfizer, seemingly giving investors some optimism that people might be able to get back into theaters sooner rather than later. But there's some serious cash burn questions still on the table as the theater chain is still burning through more than $100 million a month here.

So here to chat those risk, reward-- that breakdown with us is our next guest here. Chad Beynon is managing director, equity analyst at Macquarie Securities, covers AMC. We're also joined here by Yahoo Finance's Alexandra Canal.

And Chad, I guess we'll start with this news since it does seem like they're at least trying something to get people back in. You can rent the private theaters. How big of a boost would that be in kind of allowing AMC to create some sort of a short-term stopgap in the concerns of bleeding cash?

CHAD BEYNON: Sure, thanks, Zack. Yeah, certainly desperate times for desperate measures. So the company has raised roughly a billion dollars since April to essentially stay afloat. And they've just been waiting for the content to come out. They've done their part in terms of sanitizing the theaters and doing everything they can do for the consumers that come in. And they just haven't come.

So this was something that a few of the other companies in the space have done. As you noted, it's roughly about $100 per hour and a half or two hours showing. And what they said on the recent conference call was, there were 80,000 people who said they wanted to do this.

So essentially if you rent out one of these auditoriums, you can have 10 to 20 people. And you can watch new content that would be coming out-- there's not much, but there's a little bit-- or some of the classic films. For instance, around Halloween, "Hocus Pocus," "A Nightmare Before Christmas." So if you wanted to have a little gathering or a kid's birthday party, that's what we were seeing. And now AMC is kind of opening the doors for that.

But I don't think it's going to be much from a cash flow perspective. But it's certainly getting people back to coming to the theaters, which is what we need.

ALEXANDRA CANAL: And I want to focus in on that new content dilemma. Because we've seen some big tentpoles like "James Bond, No Time to Die," "Dune," all pushed into 2021. Now you wrote in your note, this is going to be a good thing for theaters in that post-pandemic recovery since all those new films will be featured at that time.

However, I'm wondering if these theater chains have that time to wait. We saw major Q3 losses for both AMC and Cinemark. Can this industry withstand another year, possibly more, of straight losses? What does that timeline look like for you?

CHAD BEYNON: Yeah, it's a great point. It looks like all the studios have really pushed out many of the major blockbuster movies. And those blockbuster movies that generate about $100 million domestically, they account for about 60% of the box office in the US. So they're critical to keeping these businesses afloat.

The problem with this is, the theaters are open. They're waiting for the content. And they're just sitting and praying that there won't be more delays. For instance, "Wonder Woman" on the AMC call just the other day, the CEO was asked, will "Wonder Woman" be released a week ahead of Christmas? And at that time, the answer was yes. And now it looks like that that is most likely going to be pushed back.

So to your point, I think most of the November, December, January, February movies will be pushed out. January, February isn't big in terms of seasonality. It really kicks off in March, April, May. And yeah, we've seen 44 movies pushed back from 2020 to 2021. And I think some of those 2021s will even be pushed into '22.

So cash burn, liquidity, those are the key areas of focus for companies like AMC that only has four months of liquidity right now on their balance sheet after shoring up as much as they possibly could here.

ALEXANDRA CANAL: And to that point, Chad, it seems like studios have a lot of power here. They could certainly decide that they don't want to release these tentpoles in theaters. They could go direct to consumer, like we saw Disney do with "Mulan."

I'm curious if you think that the Hollywood ecosystem is going to change as a result of this pandemic. We saw that historic deal that was struck between AMC and NBC Universal, where a film would only have to be in the theater for 17 days before being released on demand. Are these smaller chains going to fall behind if they don't strike similar partnerships?

CHAD BEYNON: So we certainly think the theatrical window, which has historically been about four to five months, particularly with big studios like Disney, that could be at risk. I don't think there's going to be many of these major blockbuster tentpoles that will go straight to the home.

With some of the examples that we did see recently, the price point is the hardest thing. So generally, a studio will earn roughly about half of its earnings at the theatrical release. And that's the main event sizing moment. It really gets the marketing out there. It creates all the other channels down the road. So bypassing that channel and going right to the home I think can cut off a significant amount of the profits. So for some of these big tentpole movies, I do think you're going to see, you know, studios like Disney to continue to push those out.

Now the bigger question is, some of these mid-market movies that generate between $30 and $100 million of revenues, is it the right-- is that still the right distribution model? And that's where I think we could see a little bit of pressure. Those movies are being intercepted by Netflix and Amazon and some of these other on-demand home venues. And I think some of those could go to the home market more frequently.

AKIKO FUJITA: Chad, let's talk about which theaters are best positioned right now. I know you've highlighted Cinemark and IMAX. IMAX one that has a lot of exposure outside of the US to a market like China that has been relatively open compared to how things have emerged here during the virus. Is that going to be enough for a company like IMAX? Or ultimately, are we going to see additional closures, additional cuts that are necessary to just get through?

CHAD BEYNON: IMAX, in many ways, is like a solid franchisee business, similar to what you would see with the restaurant industry or some of these fitness centers or even the lodging industry. They have a backlog of about 10% growth for units for the next three years. So that's one part of the business model that I think will certainly help.

In terms of the performance, they lean certainly more towards the blockbusters. They run a movie for about a week, and then it goes out of their screen. They've done a really nice job with some of the local content around the world, particularly in China, particularly in the past couple of months.

I think IMAX is in a great position. They have a clean balance sheet. They have this backlog. They have arguably the world's best premium brand. And people are willing to pay for that. So with some of these big movies that are coming out, I think the consumer, if they're going to go out and see it, if they're going to get out of their house, sit in one of these auditoriums, they want to see it in the best format, and that's what IMAX offers.

ZACK GUZMAN: Yeah, and Chad, just to put a button here on AMC, when we look at that, your latest note noted an incredible leverage ratio, 7.9 expected in adjusted earnings in 2022 with more than $5.2 billion expected in debt. When we look at the Altman Z score, one of those ratios, normalized risks of bankruptcy there, generally below 1.8 means the company is headed for that.

Right now, AMC's rating is negative 1.8, indicating a pretty serious bankruptcy risk here. When you look at that, what does it boil down to on a percentage basis of how likely it is that AMC is not going to be able to last to getting back to normal?

CHAD BEYNON: I think it's going to be near impossible for them to last without doing something else. They have an at the market equity opportunity where they can raise equity, really any day of the week, using some banks for that. That'll help them a little bit. They did decide to sell some of their assets.

Really what got them in this issue was, in 2016 and 2017, they made three $1 billion acquisitions. And I think that was one or two too many. So you could unwind some of that. They have the portfolio in the Nordic region that has kind of siphoned off. And then they're actually very large in Europe as well. And then the third acquisition was a small town chain, some of these older classic theaters.

So I think to get through this, they're certainly going to have to do something from a portfolio trimming and asset monetization standpoint. Again, they have roughly $400 million of cash right now, burning $100 million a month. So that gets into this February, March time period, which is pretty close in terms of what most people think in terms of when consumers will get out. So really, the only way that ratio improves, Zack, I think is if they do something with their portfolio.

ZACK GUZMAN: Yeah, especially when you think about how long it's going to take for the vaccine to get out there. February not exactly in line with the timeline you've seen there. But Chad Beynon, managing director, equity analyst at Macquarie Securities, appreciate you taking the time, alongside Yahoo Finance's Alexandra Canal. Thanks again.