NEW YORK--()--The ratings of Regal Entertainment Group (Regal) and Regal Cinemas Corporation (Regal Cinemas) are unaffected following Regal's announced acquisition of Hollywood Theaters, according to Fitch Ratings. The acquisition would add 43 theaters and 513 screens to Regal's portfolio. The transaction is expected to close in the second quarter. Please see a full list of ratings at the end of the release.
According to Regal's announcement, the acquisition price will consist of $191 million in cash, which a portion will be used to repay approximately $157 million of the seller's debt. Regal will also assume approximately $47 million in lease obligations.
Fitch expects the acquisition to be funded with the $250 million HoldCo Note offering from Jan. 14, 2013 ('Fitch Rates Regal's Note Offering 'B-'/'RR6'). Including roughly $250 million of proceeds from the January issuance, Fitch estimates liquidity of roughly $360 million in cash (cash balance at Dec. 27, 2012 was $110 million) and $82 million of availability (as of Sept. 27, 2012) under Regal Cinemas' $85 million revolving credit facility due May 2015.
The acquisition is consistent with Fitch's expectation that there will be further consolidation in the industry and is factored into current ratings for Regal and its peers. Heightened consolidation is primarily being driven by ease of capital market access and the expected obsolescence of traditional celluloid film. Material debt-funded acquisitions that drove leverage beyond Fitch's long-term threshold of 4.5x for Regal could have a negative impact on ratings.
As of Dec. 27, 2012 (pro forma for the January issuance and Hollywood capital and financing lease obligations), Fitch calculates unadjusted gross leverage at 4.2x. Regal disclosed a pre-synergy transaction multiple of 5.9x cash flow as part of its acquisition announcement (implies roughly $40 million of annual cash flow). Inclusive of the incremental debt and $40 million of annual cash flow (assuming cash flow is equal to EBITDA) from Hollywood, Fitch estimates pro forma gross unadjusted leverage at 3.9x.
The current ratings and Stable Outlook reflect the following considerations:
--Fitch believes movie exhibition will continue to be a key promotion window for the movie studios' biggest/most profitable releases.
--Fitch recognizes that theater attendance is inherently volatile due to the quality of the film slate in any given year. The 2013 slate is promising with many sequels including, The Hunger Games: Catching Fire, Iron Man 3, Star Trek Into Darkness, The Hobbit: The Desolation of Smaug, and Thor: The Dark World. However, due to the strong 2012 performance (+6.5% according to Box Office Mojo), which will be a challenge to match, Fitch's current base case for 2013 is for attendance to decline in the low single digits.
--For the long term, Fitch continues to expect that the movie exhibitor industry will be challenged in growing attendance and any potential attendance declines will offset some of the growth in average ticket prices. The ratings factor in the intermediate/long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, the pressure on film distribution windows, and increasing indirect competition from other distribution channels (such as VOD and other OTT services). Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.
--Fitch does not anticipate a significant decline in concession revenue per patron, but remains cautious that high-margin concessions (which represent 26% of Regal's total revenues and carry 87% gross margins), may be vulnerable to reduced per-guest concession spending due to economic cyclical factors or a re-acceleration of commodity prices. A slight deterioration in concession margin is factored into the current rating. While Fitch expects increased concession spending per guest, margins are expected to contract due to the lower margin premium menu offerings introduced by Regal and other theater circuits.
--Fitch believes that Regal will continue to focus free cash flow (FCF) deployment toward build-out/expansion of theaters, acquisition of theater assets, and/or for shareholder-friendly activities.
--Fitch heavily weighs the prospective challenges facing Regal and its industry peers in arriving at the long-term credit ratings. Significant improvements in the operating environment (e.g. sustainable increases in attendance) and sustained deleveraging could have a positive effect on the rating, though Fitch views this as unlikely.
--Fitch anticipates that Regal, and other movie exhibitors, will continue to consolidate. While not anticipated, a material debt-funded acquisition or return of capital to shareholders that would raise the unadjusted gross leverage beyond 4.5x could have a negative impact on the rating.
--In addition, meaningful, sustained declines in attendance and/or per-guest concession spending which drove leverage beyond 4.5x could pressure the rating as well.
Free Cash Flow
Fitch estimates FCF (less dividends) for latest 12 months ended Dec. 27, 2012 was roughly negative $30 million. Fitch's FCF calculation deducts both the $155 million special dividend and Regal's regular dividend. In 2013, including its regular dividend payment, Fitch expects FCF to be roughly $50 million to $75 million. The company does not have any pension obligations.
There are no significant maturities until 2017 when the term loan facility comes due.
As of Dec. 27, 2012, pro forma for the $250 million Regal issuance in January, gross debt totaled $2.2 billion and was made up of:
--Regal Cinemas' $990 million secured term loans (due 2017);
--Regal Cinemas' $400 million unsecured notes (due 2019);
--Regal's $525 million unsecured notes (due 2018); and
--Regal's $250 million unsecured notes (due 2025).
Regal's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company and, thus, recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation. Fitch estimates a distressed enterprise valuation of $1.7 billion, using a 5x multiple and including an estimate for Regal's roughly 20% stake in National CineMedia, LLC of approximately $190 million. Based on this enterprise valuation, which is before any administrative claims, overall recovery relative to total current debt outstanding is approximately 75%.
The 'RR1' Recovery Rating for the company's credit facilities reflects Fitch's belief that 91%-100% expected recovery is reasonable. While Fitch does not assign Recovery Ratings for the company's operating lease obligations, it is assumed the company rejects only 30% of its remaining $3.2 billion in operating lease commitments due to their significance to the operations in a going-concern scenario and is liable for 15% of those rejected values (at a net present value). Fitch's recovery analysis shows 84% recovery for Regal Cinemas' senior unsecured notes (equal in ranking to the rejected operating leases), which maps to an 'RR2' Recovery Rating. The 'RR6' assigned to Regal's senior unsecured notes reflects the structural subordination of the notes and Fitch's expectation for zero recovery.
Fitch currently rates Regal and Regal Cinemas as follows:
--Issuer Default Rating (IDR) 'B+';
--Senior unsecured notes 'B-/RR6'.
--Senior secured credit facility 'BB+/RR1';
--Senior unsecured notes 'BB/RR2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 08, 2012);
--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers