Feb 19 - 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
--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
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
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