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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Carmike Cinemas (NASDAQ:CKEC) announced today that it will acquire 16 theaters including 251 screens. Carmike will purchase 16 theaters and 251 screens from Rave Reviews Cinemas, LLC for $19 million in cash and $100.4 million of assumed lease obligations. Each of the 251 screens has been digitally converted and 40% of the screens are outfitted for 3D. Seven of the acquired theaters include an IMAX large format screen, which will be the first in Carmike’s circuit as it typically utilizes its own “BigD” large format screen. Also, all 251 screens are already participants in the Screenvision network, of which Carmike is a partner. The new theaters increase Carmike’s overall screen count to at least 2,496 in Q4 from 2,245 in Q2 (assuming no net screen additions in Q3) with quality digital screens in relatively new theaters (the average age of the acquired theaters is eight years). The acquisition also improves the average screens per theater to 10 in 2013 from 9.4 in 2011. We believe this is the first step toward Carmike’s goal of returning to 300 theaters with 3,000 screens.
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The acquisition increases enterprise value by $120 million and should contribute $24 million or more to EBITDA in 2013, so Carmike paid ≈≈≈5x EBITDA. Including capital leases, debt increases by $100.3 million as a result of the acquisition, and the company will spend $19 million in cash. Taken together, enterprise value increases by $120 million. We previously anticipated Adjusted EBITDA of $98.2 million in 2013 prior to the acquisition. In the press release, Carmike details the Adjusted EBITDA of the 16 theaters during the twelve months ended June 28 as being $23.6 million. We assume no additional capital expenditures will be required, and expect synergies that will positively impact financials in 2013, so we estimate that Adjusted EBITDA will increase by ≈ $24 million in 2013. However, we expect to adjust our estimates for Q3 after a difficult box office quarter, which will have a negative impact on the base Adjusted EBITDA.
We will revise our estimates in the next several days, to reflect a difficult Q3 box office with lower-than-expected results. Once we have completed factoring in lower box office, we will revise our pro forma estimates for Carmike, increasing debt and EBITDA to reflect contribution from the Rave acquisition.
Carmike completed a secondary offering early in Q2, and refinanced its debt. In April, Carmike completed a secondary offering, raising ≈ $56 million by issuing 4.6 million common shares at $13. Also, Carmike sold $210 million in 7.375% senior secured notes due 2019 to replace its January 2010 senior secured term loan due 2016, and opened a new $25 million revolving credit facility to replace its existing $30 million revolving credit facility. The proceeds were primarily used to retire the existing debt. The company has been vocal about its intent to utilize its excess cash for both organic growth and accretive acquisitions. We believe this $19 million acquisition marks the first wave of growth for Carmike, which we expect to continue throughout the fourth quarter and the upcoming fiscal year.
Carmike’s Screenvision partnership should contribute solid profits in 2012 and 2013. Under Carmike’s agreement with Screenvision, Carmike received a $30 million initial payment and a 20% ownership interest in Screenvision (which can fluctuate from 15 – 25% depending on Screenvision’s performance) in return for a 30-year extension to the two companies’ existing relationship. While Carmike recognized an accounting loss of ≈ $400,000 from its Screenvision stake in Q2, below our expectations, we expect that it will be 2H weighted, for a year-over-year increase of at least 10% for the full year. Carmike earned $1.8 million of income in 2011, which resulted in an incremental $0.14 to EPS. We expect Screenvision to contribute $2.0 million over the course of 2012, or $0.12 in incremental EPS, and $3.0 million in 2013, or $0.17.
Carmike remains very nimble in addressing potential revenue growth opportunities. Due to its strong digital presence, Carmike is able to adjust the films displayed on each of its screens, maximizing revenues through timing (for example, a kids’ movie playing on a screen in the afternoon, and an R-rated movie playing on that same screen at night) and theater size (more popular movies in larger auditoriums). Also, given that the new theaters are all equipped for digital projection, Carmike has fewer concerns regarding the major studios’ upcoming switch to fully digital, expected by the end of the calendar year.
Reiterating our OUTPERFORM rating, while placing our $21 price target under review. Our $21 price target reflects a 6.0x EV/EBITDA multiple applied to our 2013 estimate prior to adjustments. Our multiple is in line with its peers, and we add a ≈ 7x multiple applied to $3 million in incremental income we project in 2013 income from Screenvision. This is a slight premium to its historical multiple of 5.9x given the potential for substantial upside should revenue surpass expectations.
Risks to attainment of our share price target include the potential impact of a weak macro environment, potentially elevated legal expenses, uncertain box office performance, competitor encroachment into large-format arena, lackluster consumer acceptance of 3D, and secular changes that may affect how movies are watched.
Michael Pachter is an analyst at Wedbush Securities.
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