ARTICLE

There’s Something Wrong

with This Picture

Everyday life in much of the country is starting to resemble the normal existence we once knew.
So, did you rush out to your local cinema to see “Black Widow,” the latest superhero film from
Marvel Studios, when it debuted in early July? Probably not. For all the hype heralding the return
of normal life again in a post-pandemic world, there was little about the debut performance
of Black Widow that resembled a pre-pandemic premiere of a blockbuster film. Its opening
weekend North American box office gross was $80 million, a post-pandemic high for a theatrical
release but far short of other well-received blockbusters in the pre-COVID world. Moreover,
Disney simultaneously streamed the movie on its Disney+ platform, where it grossed another $60
million that bypassed theatres entirely.1 If that sounds unusual, get used to it.

For years, studios have made it a mission to shorten the industry since the pandemic began — and we don’t just
exclusivity window with theatres, and the prospect of mean AMC Entertainment.3 It’s a perplexing and extreme
achieving that goal has been hastened by the pandemic. example of the Wild West environment that’s prevailed in
“Space Jam 2,” which also streamed on HBO Max, grossed capital markets for more than a year, and it’s happening
$32 million domestically in its opening weekend on nearly on a scale that is having a notable impact on corporate
4,000 screens — hardly a runaway hit despite industry decisions and business outcomes.
efforts to spin its better-than–expected debut as a smash.
That the domestic movie theatre sector has been in
Its opening domestic box office gross was slightly better
slow but steady decline for nearly two decades is widely
than the original Space Jam’s $28 million debut way back
known, and COVID-19 has accelerated this decline. Movie
in 1996.2 There might be no industry sector that has more
ticket sales have been gradually slipping since the turn of
secular negative trends working against it than movie
this century, with box office admissions in 2019 coming
theatres, but that unpleasant reality hasn’t stopped
in 20% below those of 2002 (Figure 1), or more than 300
investors from throwing billions of new capital at the
million fewer tickets sold annually.
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This wasn’t just one bad year; the trend in movie theatre chains and reduce film marketing costs as well.
attendance since 2002 is unmistakably one of decline. Large theatre chains have threatened to not exhibit films
Hefty ticket price hikes in some years have offset some of studios that impose exceptionally short windows or
of this slippage in attendance (or perhaps caused it). simultaneous streaming, but those threats have become
Further compounding these woes, the number of movie more toothless in recent years. Americans got used to
screens in North America has been gradually increasing streaming first-run movies at home during the pandemic,
over the same period. There were nearly 41,000 screens in and many have upgraded their home theatre systems
2019 compared to 35,000 in 2002 (Figure 1). This supply- to the point where even blockbuster action movies can
demand imbalance leads to an obvious conclusion be enjoyed with the family from the comfort and safety
that the country is over-screened, and the curtain will of home — and save a few bucks as well. Theatre chains
have to come down on several thousand screens if any won’t be going the way of video stores, but it’s likely that
semblance of equilibrium is to be restored. moviegoing is an activity that will continue to lose allure
with consumers, and there is little sign that this trend is
The theatre sector went through a massive restructuring
reversible. Much like in-store shopping, Americans will
period starting in the late nineties following the advent
still go to the movies; they’ll just do it less often. None of
of the megaplex theatre earlier that decade along with
this is breaking news.
a building boom that ushered in an explosion of new
theatres in 8-12 screen megaplexes and the demise The COVID-19 pandemic shut down movie theatres for
of single-screen and two-screen theatres and small much of 2020. North American box office gross dropped
theatre circuits. Several major theatre chains filed for to $2 billion from $11 billion in 20196, a crippling blow to
bankruptcy in the early 2000s, which led to a wave of an industry already contending with threats on several
consolidation in the industry.4 Screen count contracted fronts. Several smaller chains filed for bankruptcy as
slightly between 1999 and 2001, the only time that ever a direct result of COVID-related impacts7, while the
happened. Megaplex theatres offered viewers a sight- largest theatre chains lost billions but were able to raise
and-sound experience unlike any other moviegoers had boatloads of capital to get them through the pandemic.
ever enjoyed. But the large chains all offered moviegoers Major chains and other theatre-dependent companies
the same awesome experience and films, so this gave no have considerably more liquidity today than before
one a particular advantage. Nor did it encourage more the pandemic. AMC Entertainment has raised $1 billion
frequent moviegoing. After a decade of stronger box in equity capital (and tapped debt markets as well) at
office admissions during the nineties, ticket sales peaked prices far above its market value prior to the pandemic.
in 2002 and have been declining ever since. Theatre At its peak valuation in June, AMC’s equity market cap
chains found themselves competing for a stagnant exceeded $30 billion, or nearly three times the industry’s
customer base in these very expensive new theatres. That North American box office gross.8 Cinemark raised $1.5
dynamic has mostly prevailed for much of this century. billion from unsecured note issuances in 2020 at yields
of less than 6%. Cineworld and IMAX Corp. also raised
Adding to these challenges, studios have tried relentlessly
substantial amounts of debt to get them through the
to shrink the exclusivity window with theatres before
lockdown periods.9 AMC and Cineworld likely averted
movies could be released to video or streamed, from 120
bankruptcy filings during the pandemic by their ability
days to 90 days and moving lower.5 Prior to the pandemic
to raise capital at a most stressful time. But it’s all low-
it was widely believed that the relationship between
risk money because Americans will be rushing back to
movie studios and theatre chains was a symbiotic one,
theatres once the economy is reopened, right? Not so
but the thinking now is that theatres need studios more
fast. Sure, there’s pent-up demand to see movies again,
than studios need theatres. Bypassing theatres for
as there has been for other activities that were off-limits
direct-to-home releases potentially can be very lucrative
during the COVID period.
for studios, who can avoid a costly revenue split with
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So how long will it last and how long will it take to get GameStop, The GEO Group and Exela Technologies also
back to 2019 performance levels? Sell-side analysts — the have pulled off significant equity raises that provided
most optimistic bunch of corporate trackers out there financial runway to address their problems. All these
— don’t see theatre chains getting back to 2019 EBITDA capital market raises have implications for restructuring
levels until 2023, and with lower revenues, no less. It activity. It takes time to blow through large sums of
doesn’t really compute given the trends in place. money even for the most distressed companies. Recent
capital raises for deeply speculative-grade issuers have
The larger point here is that the willingness of capital
come with few strings attached. Performance covenants
providers and meme stock investors to support highly
and restrictive covenants in credit documentation
challenged companies in distressed industry sectors,
continue to strongly favor borrowers in a liquidity-driven
however head-scratching it may seem, is buying time
credit world. With capital markets showing little sign of
for troubled companies to plod along, perhaps for a few
a letup, restructuring professionals will have to put their
more years. In particular, the meme stock craze, rather
eyes back in their heads and wait it out. In the meantime,
than just creating gains or losses for day traders, is being
get out and go see a few movies.
exploited for capital raising.

Figure 1 - North American Movie Screens vs. Box Office Admissions

Screens [LHS] Box Office Admissions [RHS] Admissions

Screens
(in millions)
42,000 1,600
40,000
1,500
38,000
1,400
36,000
34,000 1,300
32,000
1,200
30,000
1,100
28,000
26,000 1,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

Source: National Association of Theatre Owners

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Endnotes
1. Variety
2. Forbes.com
3. Forbes.com
4. The Motely Fool
5. Observer.com
6. CNBC.com
7. Cinemablend, Bloomberg.com
8. Yahoo Finance
9. Barron’s

MICHAEL EISENBAND
Global Co-Leader, Corporate Finance & Restructuring
+1.212.499.3647
[email protected]

Learn more at fticonsulting.com/covid19

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