A Lack Of Vision Is Driving AMC To Bankruptcy. What’s Next?

AMC is close to declaring bankruptcy. It is seeking another lifeline by trying to sell up to 15 million additional class A shares to stay afloat. But the odds that it will be able to avoid a Chapter 11 restructuring are nil.

Steve Moyer, a financial expert and colleague at the USC Marshall School of Business, recently reviewed AMC’s financial situation. His assessment is that, “On June 30, current liabilities exceeded current assets by around $1 billion—that’s a strong indication of imminent insolvency. It is burning at least $100 million a month in cash. While the company has recently raised around $300 million and reduced its debt and cash interest expense, they have very limited financial flexibility at this point. I suspect a Chapter 11 filing is in the works.” More from Steve in a moment.

Some will be quick to assume that AMC’s demise will be due solely to COVID-19, but the seeds of the company’s demise were sowed well beforehand. Since the company’s founding way back in 1920, it never successfully addressed the competitive onslaught of radio, then television, and now streaming that cut into its business. Instead, it stuck with what it knew rather than addressing shifting technologies and consumer behaviors. All theater chains suffered from the same lack of vision. The result: the percentage of people attending theaters on a weekly basis fell from about 65% in the 1930’s to about 10% in 2019, pre-pandemic.

There’s an old adage, when you’re a hammer, everything looks like a nail. AMC needed an entire tool box but it never recognized this. Instead of embracing new distribution pathways, the company focused on improving what it already did by taking on massive debt to enhance food services and sound/image quality. But these enhancements did little to attract audiences that continued to flock to other options, most recently streaming. AMC’s most recent activities smell of extreme desperation, like begging consumers to rent a theater for $99 and an NBCUniversal deal that allows the studio to stream films a mere 17 days after they appear in theaters.

Consider a different company with a powerful vision – Netflix
NFLX
. A relative newcomer, it was founded in 1997 as a company that mailed customers DVDs for rent and sale. Realizing that was a dying business, Netflix pivoted to streaming in 2007 and licensed content from studios. Recognizing the danger of relying solely on studio content, Netflix started to create its own. The net result is a market cap of $215 BILLION as of October 23, 2020 compared to AMC’s meager $324 million. That’s what a powerful vision can do.

If AMC had the foresight to create a streaming option first, it would have offered studios a powerful, complete distribution solution that took films seamlessly from theater to in-home. But it didn’t. It could have created original content. But it didn’t. AMC had a nearly 80-year advantage over Netflix, yet it could not think beyond its traditional business model. When its sole distribution was disrupted by COVID-19 and content from studios vanished, AMC’s business ground to a halt.

Making matters worse, theater chains have been anti-consumer for a long time. They raised prices on tickets and concessions to compensate for a dwindling customer base. They also restricted audience access to films by threatening studios with boycotts if studios attempted to offer films for in-home use too soon after the theatrical release began. Yet consumers want to see films in the venues they wish, when they wish, at a price that fits their budgets. Theater chains denied consumers of this flexibility.

What happens next? Professor Moyer tells me that, “The only way to fix AMC’s balance sheet is via a Ch 11 process. That will allow the company to renegotiate its leases and reduce its debt load.” The key issue, he notes, is valuation. “Near-term, the numerous spikes in COVID-19 cases and the push-back of blockbuster releases will delay theaters’ reboot. Long-term, it’s hard to assess what the impact of the pandemic will be on entertainment content delivery. There’s about $3.7 billion of first-lien debt trading in the low 60s and another $1.4 billion of second-lien debt trading under 10. That suggests investors are pretty skeptical.”

In an April, 26 Forbes article, I predicted that entertainment giants might swoop in to take a stake in theater chains. This would allow streaming giants to expand their distribution options, something Netflix has desired for years much to the resistance of theater chains. Taking a stake in theater chains would also benefit traditional studios like Disney because it will secure the theatrical outlet for their films.

Out of the ashes of COVID-19 will rise an industry where giant entertainment companies gain even more influence, where theater chains lose even more influence, and where consumers gain viewing options that better fit their lifestyles. It was a long time coming, and in many ways, it is the theaters’ own fault for their lack of vision.