Coronavirus threatens to shrink struggling US movie theater chains
Coming to a theater near you: a marquee with no movie titles on it, but instead big letters that say “gone out of business.”
With movie houses nationwide closed by the coronavirus, big cinema chains like AMC Entertainment and Regal Cinemas parent CineWorld are at risk of filing for bankruptcy in the coming weeks or months — desperate moves that could result in hundreds or even thousands of theaters being shuttered for good, industry experts warn.
In a Wednesday note to investors, Loop Capital analyst Alan Gould wrote that he expects one quarter of movie theater screens in the US will close in the aftermath of the pandemic. Since mid-March, the virus has caused the temporary closure of nearly all of the country’s 40,000-plus screens, and studios’ delay of premieres for a slew of summer blockbusters.
The big and unanswered question, according to experts: How long will the COVID-19 crisis last, and how much pain can landlords take?
“Without ticket and concession revenue, there will likely be a lot of unpaid rent, and it’s anyone’s guess whether the landlords will terminate the leases and evict the tenants or whether they will just deal with it,” says Wedbush Securities analyst Michael Pachter.
“Even if we put the virus behind us, lots of people are going to avoid retail and movie theaters till they are comfortable that they are inoculated against the next iteration of the virus,” Pachter warned.
AMC, which has reportedly hired law firm Gibson Dunn & Crutcher to advise on a possible restructuring, has signaled it’s ready to negotiate major breaks on rent. A recent letter from senior VP Daniel Ellis informed landlords it would stop paying rent in April after shuttering its 630 US theaters on March 17 and furloughing 25,000 workers.
“AMC is willing to discuss with you any suggestions you may have for getting through this crisis and planning for when AMC can reopen and pay rent,” Ellis wrote in the letter, which was first reported on Tuesday by Deadline Hollywood.
To be sure, big cinema chains have been staking out an argument for leniency. Cineworld, the owner of Regal Cinemas, warned last month that any “material uncertainty” may “cast significant doubt” about its ability to stay in business and put it at risk of breaching its debt covenants. AMC, struggling under a $4.9 billion debt load with a market value of just $344 million as of Wednesday’s close, was already in a weak position even before the crisis started, according to Loop Capital’s Gould.
“AMC was over-levered going into the 100-year storm, otherwise known as Covid-19,” said Gould, who on Wednesday cut his rating on AMC shares to sell from hold. “We had been concerned about liquidity and now believe AMC either runs out of cash or requires a highly-dilutive financing.”
AMC is likely to burn through much of its cash by mid-summer, the analyst predicts. Last week, AMC chief executive Adam Aron optimistically told CNBC that he expected the chain to re-open in mid-June. But Gould disagreed, noting that a more likely scenario is for theaters to reopen “gradually” in the third quarter with distancing between seats.
Credit-rating agency Standard & Poor’s echoed that sentiment in a report last week, predicting that AMC’s doors will remain closed “beyond June.” S&P said AMC does not have “sufficient sources of liquidity to cover its expected negative cash flows past mid-summer,” likely causing it to breach a debt covenant in September.
In March, Universal Pictures pushed back the release of “Fast & Furious 9” — the latest installment of its car-chase franchise starring Vin Diesel — from next month to April 2021. Disney pushed back its March 27 release of “Mulan” to July 24, and Marvel’s “Black Widow” from May 1 to Nov. 6. And the latest James Bond flick, “No Time to Die,” grabbed headlines when MGM, Universal and Eon postponed the film’s release to November from April.
If cinemas opt for bankruptcy in lieu of summer blockbusters, AMC’s chain of roughly 200 lower-price Classic Theatres, which it took over when it acquired Carmike in 2016 for $1.2 billion, would be among the likely casualties, according to Deadline Hollywood. Mall-based theater locations, meanwhile, are likely to get more leeway from landlords as they are seen as key traffic drivers.
“In high-traffic areas, theaters may not make as much sense, but it’s not likely anyone is going to step up to take over these leases anytime soon,” said Wedbush’s Pachter. “I think this is one of the under-covered stories of the pandemic, since retail is going to be hurting badly until there is a vaccine.”