Should Disney Buy AMC?

The warnings from AMC Entertainment Holdings (NYSE: AMC) that it is about to run out of cash are becoming more urgent. The movie theater operator says it has enough cash to last until the end of the year, maybe into early 2021.

It is selling stock to remain afloat, although that will significantly dilute existing shareholders. But maybe a bailout in the form of an acquisition would save the theater chain from the abyss. Although any movie studio could acquire AMC, Walt Disney (NYSE: DIS) might want to give it serious consideration.

Moviegoers cheering

Image source: Getty Images.

One studio to rule them all

Movie studios only became eligible to buy theater chains in August, after the Justice Department moved to end what were known as the Paramount Consent Decrees, which prohibited such vertical integration in the industry.

The decrees were imposed on eight major motion picture studios in 1948 after the Justice Department sued them for antitrust violations for engaging in what was seen as a wide-spread conspiracy to illegally fix movie ticket prices and monopolize both content distribution and the theaters themselves.

Yet the industry has undergone substantial changes in the 70 years since they were imposed. Single-screen theaters that were the norm back then have given way to multiplexes showing numerous movies from many distributors, encouraging studios to maximize profits by broadly distributing their movies.

Moreover, streaming video services, broadcast and cable TV, and the internet did not exist. Now they are how most people consume entertainment.

Streaming to the top

Disney is far and away the studio leader, with a 38% share of the market after its acquisition of 20th Century Fox. It is followed distantly by AT&T's Warner Bros., with a 13.8% share; Comcast's Universal Pictures at 13.4%; and Sony with 11.4%.

Disney recently said it would be focusing its attention on its Disney+ streaming service, which has reeled in over 60 million subscribers in less than a year's time. But many of those subscribers came as the result of Verizon giving out free one-year subscriptions (I'm one of them), so it remains to be seen how many will stay.

It also just unveiled a major reorganization of its entertainment holdings that will have one division concentrating on creating content and another distributing it. In a company statement, CEO Bob Chapek said, "Managing content creation distinct from distribution will allow us to be more effective and nimble in making the content consumers want most, delivered in the way they prefer to consume it."

It also aligns well with Disney acquiring AMC.

A vast reach

AMC is the largest theater operator in the world, with approximately 1,000 theaters and 11,000 screens. In the U.S. it had 620 theaters with nearly 8,000 screens.

AMC says its ability to continue as a going concern is in grave doubt and bankruptcy is a possibility because it cannot attract enough moviegoers to its theaters.

As studios push their film debuts out into 2021, the theater operator is left with little choice but to show reruns, and that's not filling the seats. It is even willing to rent out entire theaters for $99 just to get some usage out of its cinemas.

Disney buying at least the U.S. business of AMC would help its ambitious plans for content creation and distribution.

The all-Disney channel

The window of movie exclusivity in theaters is narrowing, and AMC recently signed a deal with Paramount Pictures to reduce it to just 17 days in exchange for getting a cut of the streaming rights afterwards.

If Disney bought AMC, it would be able to keep all of the profits from the theater showings and the subsequent streaming opportunities on Disney+ to itself. An acquisition would also provide Disney with massive branding opportunities and give moviegoers a chance to visit a theater offering moviegoers a choice among Star Wars, Marvel, Pixar, and Disney classic movies.

Moviegoers would then be able to go home and see them again on the small screen. Creating a discounted movie pass to bounce back and forth between theater and Disney+ could be a winning combination.

A marquee name

Consumers still want the big-screen experience, and movie theaters probably won't remain closed forever. AMC has increasingly been transforming its theaters into a luxury experience, with premium seating, dine-in theaters, IMAX screens, and Dolby sound. Of its 8,000 U.S. screens, almost 3,300, or around 40%, of all its screens are offering this premium format.

Certainly Paramount or Universal, or even Netflix and Amazon, as was rumored earlier this year, could also benefit from buying the theater operator. But Disney's size, scope, and branding potential would make acquiring AMC Entertainment a blockbuster event.

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