Inside Wall Street: Is Regal a takeover target?

Shares of the largest US motion picture exhibitor are surging as buyout speculation resurfaces.

By Gene Marcial Oct 8, 2012 8:26AM

Movies, Fuse, Getty Images, for Inside Wall Street post on Regal Cinemas Some analysts regard Regal Entertainment Group (RGC) as chronically undervalued, but its shares have been surging of late, trading close to a 52-week high of more than $14, up from $11 earlier in the year.

 

Even at that level, the stock is considered undervalued by some pros. The reason: Apart from its valuable assets, continued growth and prospects for expanded market reach, Regal is among the names on the pros' lists of takeover bets. The stock, which provides an enticing 5.7% dividend, is worth at least $25 a share, some analysts say.

 

The largest motion picture exhibitor in the U.S., Regal operates 6,552 screens in more than 500 locations in 37 states and the District of Columbia. Its multi-screen movie theaters, among them Regal Cinemas, United Artists Theatres, and Edwards Theatres, are in 43 of the top 50 U.S. market areas. Regal operates 17% of total U.S. movie screens and drew 212 million moviegoers in 2011.

 

Analyst Matthew Harrigan of Wunderlich Securities figures that private-equity companies may take another look at the group, with its $1 trillion cash hoard, coupled with the movie exhibition industry's reasonable return on invested capital.

 

He notes that Regal's stock on Oct. 3 surged 4.7% on above-normal volume of 2.86 million shares. "The most plausible rationale to us," Harrigan says, is that the stock is being perceived as a possible buyout candidate. Possibly, he says, private-equity companies are thinking of "revisiting" the movie entertainment group as a source of likely acquisition targets.

 

Private-equity investors had a not-so-positive experience with their investment in AMC Entertainment when they tried to take it public. They tried repeatedly to help do an IPO but were unsuccessful. Eventually, however, China's Wanda Group ended up buying AMC earlier this year. Before that, "Apollo, CCMP, Bain and others found it famously difficult to IPO AMC after three attempts," Harrigan says.

 

There is consolidation going on now in the industry, with Carmike (CKEC) buying Rave Reviews Cinemas at a modest price-earnings multiple, Harrigan says. So the recent activity in Regal’s stock may indeed be signaling that it is starting to attract some interest from private-equity investors. Harrigan rates Regal as a "buy" with a price target of $25 a share.

 

Harrigan is optimistic about Regal's growth prospects. "We continue to look for strong improved fourth quarter results, with easy comparisons for products such as Skyfall, the 23rd James Bond film; the final Twilight movie; and the first Hobbit film from Peter Jackson, plus some wild cards such as Ang Lee’s Life of Pi," Harrigan says.

 

Chad Beynon, an analyst at Macquarie Equities Research, continues to recommend Regal’s stock as "outperform," based mainly, he says, on its consistent dividend policy, strong free cash flow generation, and stable business trends.


Darren Prinz, a portfolio manager at hedge fund Peconic Partners, which owns Regal shares, says the movie operator is in the midst of acquiring more assets as it sees renewed vigor in the sector because the switch to digital technology has made the business more efficient, cost-effective and profitable.

 

"There’s lots of growth potential in the industry," says Prinz, who adds that the use of digital systems in streaming film content to the theaters opens possibilities for alternative entertainment activity in the theaters. Regal is now in the midst of looking for assets to acquire, including other exhibitors who find it difficult to switch their operations to digital.

 

As its assets grow and its market expands, Regal becomes an even more attractive investment, says Prinz, who remains bullish about the stock and the industry’s growth outlook in the digital world.

 

 

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