The three most important revenue streams (in descending order) for the majority of cinema operators are:
- Box office revenues (a function of the number of admissions and the ticket price per admission, less tax);
- Food & Beverage; and
- Advertising (typically advertising derived from advertising, distribution, screen hires and sponsorship etc)
2014 was a strange year for the sector, with box office admissions up a miserly 1% in North America whilst in the UK they fell 2.3% – the second consecutive year of decline. Admissions fared worse, with both regions posting a fall of roughly 6%; with the UK figure falling to its lowest level for more than seven years, no doubt helped by the World Cup last summer. However, this hasn’t affected some operators, as Cineworld’s most recently released results show that despite these issues, well-invested estates, supported by a stronger food & beverage offering and careful cost management, can help to enhance the customer experience and justify higher average ticket prices.
Though the volume of M&A in the sector in 2014 was lower than the two previous years, there were four key deals: The first was the c.£500m merger between Cineworld Plc and Central & Eastern European and Israeli chain Cinema City International – creating Europe’s second largest cinema chain that ended 2014 operating 1,875 screens in 203 cinemas across nine countries; The second was the $385m acquisition of Russia’s largest cinema chain, Cinema Park, by the 19 year old son of one of Russia’s richest businessmen; Vue, backed by OMERS, the private equity arm of the Canadian pension fund consolidated its position in the Italian market via a €105m acquisition of market leader The Space Cinema; and finally China’s 149th richest man, Sun Xishunag acquired Australia’s second largest multiplex operator – Hoyts Group – in a deal worth up to $743m.
So what’s in store for 2015? We expect it to be another busy year for M&A in the sector – which has so far witnessed UK independent operator Light Cinemas receiving investment from Connection Capital and Latin America’s largest cinema operator – Cinépolis – acquiring the Chilean market leader, Cine Hoyts. Going forward Europe’s largest cinema chain, Odeon/UCI, will be looking to conclude a sale (it has already hoisted the for sale sign above its 45-strong Spanish Cinesa chain); as will listed US operators Regal Entertainment and Carmike Cinemas. We expect the strongest interest for these assets to come from international strategic groups in particular.
We also predict Vue will continue its strong M&A track record as it seeks to further expand its European footprint. Potential targets include Nordic Cinema Group (the region’s leading cinema operator with 65 theatres across six countries) and JT Bioscopen – the second largest cinema chain in The Netherlands. Both of these assets are backed by private equity owners who are willing to sell and each would provide Vue with access to new markets.
Based on the above it looks as if 2015 will be an even more exciting year for M&A in the cinema sector; much like the slate of films scheduled to be released including: 007 Spectre, Mad Max Fury Road, Ted 2 and Fast & Furious 7, amongst others – which should help to bring smiles to the faces of both viewers and operators alike.