Regal Entertainment Group, the largest U.S. cinema chain, rose the most in three years after the company said it is considering strategic options including a sale.
Regal, controlled by billionaire Philip Anschutz, retained Morgan Stanley to advise the board on “a thorough review of options,” according to a statement yesterday. The company also declared a special dividend of $1 a share and reported lower third-quarter sales and profit.
A sale would mark the biggest deal yet in an industry that’s been consolidating for years. That’s included large operators buying family owned cinemas struggling to upgrade their circuits with digital technology and larger screens. Exhibitors have also attracted foreign investors. AMCEntertainment Holdings Inc., the No. 2 chain, was purchased by China’s Dalian Wanda Group in 2012 and went public last year.
“The company is permanently undervalued,” said Matthew Harrigan, analyst at Wunderlich Securities in Denver, who has a buy rating on the stock and a $31 price target. “It’s generating a lot of free cash flow. The theatrical business is a good business.”
Regal gained 11 percent to $22.74 at 9:35 a.m. New York time. Earlier, the shares increased to $22.88 in their biggest intraday jump since July 2011.
Harrigan sees AMC Entertainment or No. 3 Cinemark Holdings Inc. as possible buyers, while cautioning that antitrust regulators at the U.S. Justice Department monitor industry consolidation in local markets. Some investors also worry cinemas will continue to lose ground to new technologies, like online streaming, he said.
AMC didn’t respond to a request for comment sent by e-mail yesterday.
“We do not speculate on reasons or motivation of their board of directors to consider strategic alternatives,” Tim Warner, chief executive officer of Plano, Texas-based Cinemark, said in an e-mailed statement.
Anschutz is worth $11.1 billion, according to the Bloomberg Billionaires Index. He holds a 78 percent voting stake in Regal, including shares with extra voting rights, company filings show.
The company has a market value of $3.2 billion and total debt of $2.36 billion, according to yesterday’s statement.
This year’s Hollywood film releases have failed to lift domestic ticket sales above record levels set in 2013. As of last weekend, ticket sales were down 3.6 percent to $8.42 billion, according to Rentrak Corp.
Regal fell short of industry trends, with third-quarter revenue shrinking 15 percent to $693.8 million from a year earlier. Attendance tumbled almost 19 percent, Chief Financial Officer David Ownby said on a call with investors.
Analysts had projected sales of $717.8 million in the period ended Sept. 25, the average of 17 estimates. Net income for the period slumped 65 percent to $26.7 million, or 17 cents a share, while profit excluding items amounted to 18 cents, beating estimates of 15 cents.
Ownby said competitors have benefited from a round of theater upgrades.
“Most of our new build projects this year are going to open in the fourth quarter,” Ownby said on the call. “And so, you really won’t see the market share impact of those until early next year.”
Cinema consolidation has been going on for years. In one recent deal, Carmike Cinemas bought Digital Cinemas Destinations Corp. For more on the trend, see As Cinemas Combine, Creativity Abounds.