Merger at the Movies

The merger announcement comes at a time of tough competition amongst theatre chains as they struggle with long-term declines in audiences and changes in consumer behaviour.

Exclusive release windows continue to shorten.  Introduction of the Video Home System (VHS) technology in the late 1970’s posed a significant threat to the traditional studio-to-cinema distribution model. Studios and cinemas created the “release window” system in the 1980’s as a strategy to keep different film formats from competing with each other. Only after a film was shown exclusively in cinemas for a particular “window” of time would it then be released for home rental or purchase. In 1999, the window had an average of 27 weeks. Today, the average is just 15 weeks, with smaller films often having release windows of just a few weeks or even days. This poses a challenge to cinemas, as they have a shorter amount of time to exploit their monopoly on the film before it becomes available on DVD or on-demand.

Netflix: from disruptor to key industry player.  The 20 year-old company that started as a simple DVD home delivery service just announced plans to release 80 original films next year. With nearly 110 million subscribers around the world, has doubled its audience base since 2014. Other streaming platforms including Amazon, Hulu and YouTube have also made significant dents in Hollywood’s business model.

While Regal has not disclosed why it selling, there are many plausible benefits to consider.  Firstly, Regal and Cineworld would likely reduce expenses across a variety of departments, as redundancies between the two – for example in marketing or finance – would be streamlined. The two chains would also benefit from joined resources, including that of knowledgeable staff, pre-existing cinemas, and the leveraging of existing networks. Cineworld would also gain access to American customers by acquiring Regal, without the start-up costs traditionally involved in venturing into new jurisdictions.

Thanks to targeted advertising and greater engagement with media, audiences have in many ways come to expect a more personalised experience.  As such, a combined cinema operator may seek to offer a greater range of services and programming to its audiences. By focusing on a wider variety of genres, cinema styles, or even locations, the merged company may capture more consumers than they would as individual operators.

By way of example, Cineworld mainly shows international blockbusters and 3D movies at large cineplexes in shopping centres. However, in 2012 it bought Picturehouse Cinemas, a network of smaller cinemas which predominantly feature highbrow, independent and foreign films. By diversifying its reach, Cineworld is able to generate income from both ends of the movie-going spectrum. Something similar may happen with Regal and Cineworld if they were to focus on their relative strengths in various markets.

Stength in numbers.  Regal operates the second largest theatre circuit in the United States, with over 7,307 screens in 564 theatres. London-headquartered Cineworld is the second largest cinema operator in Europe, with 2,049 screens in nine countries. A merger between Regal and Cineworld would pose a significant threat to the largest theatre chain in the world, AMC. Originally known as American Multi-Cinema, AMC is owned by China-based Dalian Wanda Group, and boasts 2,200 screens in 244 theatres in Europe, and over 8,200 screens in 661 theatres in the United States.

Technicalities of the takeover.  Cineworld has obtained shareholder approval for the deal, which it intends to finance through a mixture of debt (such as bank loans or bonds) and a rights issue (where current investors will be asked to buy new shares). The transaction proposed will be classified as a reverse takeover, whereby Cineworld will obtain the legal entity of Regal by buying all (or a majority) of Regal’s underlying shares (stocks). Cineworld will therefore own all of Regal’s physical and non-tangible assets, as well as its debts and liabilities – which speaks to the importance of legal due diligence. I wonder if their completion meeting will feature a red carpet and spotlights?