Are there too many movie theatres in North America? This industry veteran thinks so

In the past six months, AMC Entertainment Holdings Inc (NYSE: AMC) has raised close to $2 billion (£1.41 billion) in cash. CEO Adam Aron has expressed plans of using a chunk of these funds to add new theatres.

Ticket sales in North America have surged to a record high since the start of the pandemic in the last two weeks – an indication that an accelerated shift to online streaming amidst the COVID-19 restrictions is unlikely to put cinemas chains out of business in the post-Coronavirus world. With a greater market share, AMC intends to benefit from these ticket sales.  

David Ownby is not convinced of AMC’s plans

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The former CFO of Regal Entertainment, David Ownby, however, doesn’t see adding new locations as a laudable move. Speaking with Jefferies, the finance chief highlighted that North America already has too many screens. According to Jefferies, the region had roughly 40,000 screens before the pandemic, with the bottom 15% contributing only 5% to the total ticket sales. Ownby sees up to 35,000 as a healthy screen count.

Moviegoing was already declining before the health emergency, and as per several box office experts, the trend is likely to continue in the future.

“I don’t know if we can sustain the kind of attendance we had in the past. I personally don’t think we’ll ever get back to the levels seen in 2019,” said box office consultant Doug Stone.

With a decline in the number of guests in recent years, cinema chains have been committed to making the theatre experience more appealing with several measures, including the introduction of recliner seats. Such luxuries helped them raise ticket prices leading to sustained ticket revenue.

“I think you are going to see a reduction in the number of seats, if not screens. I think you are going to see more luxury-based entertainment. I think you are going to see these giant 30-screen complexes dry up, either get reduced or turned into some sort of luxury venue.”

AMC should prioritise minimising its debt

Chief executive Adam Aron of AMC Entertainment intends to direct proceeds from recent share sales to theatre improvements, which will be paid in cash. Some box office analysts, however, opine that AMC’s top priority should be to minimise its debt. According to MKM partners’ Eric Handler:

“AMC should focus on debt reduction rather than acquisitions. Management has been gifted with an unforeseen opportunity from the recent wave of retail investor momentum, which has pushed the shares far above historical valuation levels. With a stabilised balance sheet, AMC would be best served by using its newly raised capital to reduce its sizable $5.5 billion debt load rather than pursue acquisitions.”

At the time of writing, AMC shares are down more than 5% on the intraday chart.