Amc Case Discussion Questions
AMC Case discussion questions
Who owns AMCE and how might the nature of the ownership impact the contemplated acquisition by JPMP?
AMCE is owned by shareholders owning the common shares and shareholders owning the preferred shares (two classes [A&B] of convertible stock). The preferred shares were created because of past investments including a $250 million equity infusion by Apollo Management. The preferred shares are 52% of ACME’s shares on a fully diluted basis. The firm has a complicated share structure which could impact the acquisition by JPMP if it is not simplified. For example, if JPMP were to offer a premium too high in comparison to the current share price of $16 per share, it runs the risk of not being able to meet its targeted returns. If a low price were offered, then Apollo Management, with its ownership of 94 percent of the Series A shares, could block the deal. If Apollo Management sold out its stake in its entirety, then JPMP will have to acquire additional capital to close the transaction.
What are the positives and negatives of conducting LBOs in the movie industry?
Positives: The entertainment industry is a growing one with the emergence of multiplexes and megaplexes showing high-budget, special effects blockbuster movies. Since 1995, ticket prices rose by 43 percent and attendance by 21 percent. Overall box-office receipts grossed $9.49 billion which represented a 74 percent increase from 1995.Trends show steady growth in both, attendance and ticket prices. The profit margins are pretty high, for example, concessions have an 85% profit margin. Free cash flows are increasing which make it ideal for a LBO takeover.
Negatives: The industry is entirely dependent on the studio’s ability to produce movies.
70% of gross revenue from box office receipts, which is pretty high for an industry that is not capable of providing a stable and predictable product. Theaters have no control over their product and it tends to be a volatile marketplace. Increasing standards of visual and audio quality in home entertainment is also reducing the number of trips to the theater per household.
In what ways does AMCE conform or not conform to an “ideal LBO target”? It conforms as an ideal LBO target because it shows a potential to grow compared to its competitors, has a proven management team, and has a strong market position. However, it is in an unpredictable industry that relies heavily on the products leaving theaters with little to no control over the products they sell. So it does not have a steady and predictable cash flow.
Why does JPMP want to own AMCE? In particular, what are the value-creating opportunities for this transaction/investment?
AMC was a premier movie chain and had