Industry Description

The movie theater industry (SIC 7830, NAICS 51213) consists of companies engaged in exhibiting motion pictures in movie theaters, film festivals, and drive-in theaters.  Approximately 60% of industry sales are generated from sales of feature film admissions, the remaining comes primarily from the concession and advertising business.[1]  Movie theaters’ profitability is largely dependent upon access to popular films.  Larger theater companies experience economies of scale and increased negotiating power with movie distributors.  Smaller theater companies often limit their focus to specific genres or cater to specific audiences (e.g. high-end theaters with amenities or discount theaters with older movies).

In most cases, movie theaters serve as consumers’ first introduction to a film.  Even in cases in which consumers view films through other venues (e.g. online streaming, on-demand, DVD, Blue-ray, television), success in these channels is often dependent on success at the box office.  Traditional theater revenue models involve a revenue split between the distributor and the exhibitor (the theater).  An average of 90/10 net revenue split or an average of 60/40 gross revenue split, whichever is greater, is common.[2]  Often, the theater is allotted a weekly “house allowance” that it deducts prior to the split, although the distributor may also impose a minimum floor percentage calculated before the house allowance. Generally, revenue sharing arrangements grant a larger portion to exhibitors later in a movie’s run.

The five largest movie theater companies in the U.S. are Regal, AMC, Cinemark, Carmike, and Cineplex.  The top five account for 57% of total box office revenues.[3]

Industry Trends

The movie theater industry has changed in recent years, primarily in response to technological shifts. A few of the most significant industry trends include:

  1. Global movie theater box office revenue is about $38 billion per year, according to Motion Picture Association of America (MPAA). Global theatrical revenue continues to be driven by the strong growth of Asia Pacific region, primarily China.[4] Global movie theater market is expected to continue to benefit from the high growth in Asia Pacific, and it is projected to grow at 6.85% CAGR from 2017 to 2021.[5]
  2. Domestic box office revenue is expected to grow at a minimal pace or decrease (also at a minimal pace) once adjusted for inflation in the near term.[6] On the other hand, concession revenues is expected to continue to drive the industry growth both in terms of aggregate revenue and revenue per capita. Movie exhibitors are bringing in new concepts for food and beverage and offering better and more options.  Additionally, some movie theaters, like AMC, offer full restaurants, generating significantly more revenue.
  3. Attendance has trended downwards in the domestic market over the past 15 years,[7] which partially can be attribute to the availability of more flexible and affordable alternative forms of delivery, with the exception of mega-blockbuster films, such as Avatar and Star Wars.  There is expected to be several most popular franchises of all time released from 2017 to 2019, which might help bring growth of attendance.

Key Performance Metrics

The following are performance metrics that managers in the movie theater industry use to benchmark their performance against others in the industry:

  1. Average ticket price
  2. Number of admissions
  3. Number of screens
  4. Admissions per screen
  5. Revenues per screen

Industry Organizations and Publications

Some organizations that publish helpful information about the movie theater industry include:

  1. Motion Picture Association of America: www.mpaa.org, a film industry association that publishes theatrical market statistics
  2. National Association of Theatre Owners: www.natoonline.org, an international association representing more than 30,000 movie screens in the United States
  3. The Academy of Motion Picture Arts and Sciences: www.oscars.org, an honorary membership organization with extensive archives relating to the history of motion picture production and exhibition

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing a movie theater company.  These methods are:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities. This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets.
  2. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, and requires forecasting future cash flows.
  4. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded theater companies and privately held businesses.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Benchmark Statistics

The following benchmarking data is based on the financial performance of various movie theater companies: [8]

 

2015

2014

2013

2012

2011

Operating Profit

7.4%

7.4%

8.3%

8.0%

7.2%

Owners Compensation/Sales

3.0%

2.8%

2.5%

3.4%

3.4%

Sales/Fixed Assets

1.6

2.0

1.8

1.8

1.3

Current Ratio

0.6

0.6

0.7

0.8

0.6

 

Before using this data for specific valuation purposes it should be evaluated for appropriateness.

Availability of Publicly Traded Comparable Companies

Most of the top movie theater companies are publicly traded. The availability of financial data for publicly traded theater companies makes it possible to compare a subject company to industry benchmarks and apply industry multiples.  However, when valuing a movie theater business, it is important to use benchmarks and multiples based on companies that are similar to the subject company and be aware that multiples of certain publicly traded corporations as a whole may not necessarily reflect those of their movie exhibition divisions.

The top three publicly traded movie theater companies in the U.S., ranked by market capitalization, are:

  1. Cinemark Holdings, Inc. ($4.9 billion)
  2. Regal Entertainment Group ($3.5 billion)
  3. AMC Entertainment Holdings ($3.1 billion)

The price to earnings ratios of these companies range from 20.38 to 24.74.  The price to book ratios range from 1.95 to 3.98. [9]

Availability of Private Purchase Transactions

In addition to public companies, data regarding privately held companies can also provide a useful benchmark when valuing a movie theater business.  The size and scope of private companies that have been bought and sold over the last five years varies greatly, both in terms of their sales and the purchase price paid for the companies.

From January 1, 2012 through December 31, 2016, the ratio of:[10]

  1. Market value of invested capital (MVIC) to net sales range from 0.06 to 1.41, with a median of 0.73.
  1. MVIC to earnings before interest, taxes and depreciation (EBITDA) range from 7.38 to 11.30, with a median of 9.34.

As with selecting publicly traded guideline companies, care should be given to select private transactions that share similarities with the subject company.  The financial metrics of a potential guideline transaction should be compared with those of the subject. Additionally, industry economic conditions vary over time, which can affect movie theaters as investment opportunities.  Specific factors that are unique for each business must be considered.

Fulcrum Inquiry performs business appraisals for movie theaters and other businesses.

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[1] Redwood Capital, North American Cinema Exhibitor Report.

[2] Entertainment How Stuff Works, How Movie Distribution Works.

[3] Redwood Capital

[4] MPAA, Annual Theatrical Statistics Summary.

[5] 360 Market Sales Updates, Movie Theater Market Research Report.

[6] Deloitte, The Award for Stable Box Office Revenues in the Face of Digital Media Goes to…

[7] Deloitte

[8] Risk Management Association (RMA), Annual eStatement Studies.

[9] Yahoo Finance

[10] Pratt’s Stats