Stock Market

AMC Entertainment (NYSE:AMC) is not too big to fail.

But it is too important to fail.

The machinations of CEO Adam Aron, who used the meme stock rally of 2021 to sell shares, then issued preferred stock to raise more cash, are easy to criticize. But it worked, while investors in rival Cineworld (OTCMKTS:CNNWQ) were wiped out.

Of course, now Hollywood’s writers are on strike. Other unions may follow. A 2007 strike eventually dried up theaters’ flow of blockbusters, and blockbusters are the only movies worth showing anymore.

Why, then, can’t AMC fail?

A Little History

The men who founded Hollywood’s movie studios weren’t entertainment executives. They were theater owners, looking to assure a steady stream of productions to their real estate.

In 1948, the Supreme Court split the studios from the theaters in what is known as the Paramount decision. While TV broadcasters eventually got around this, movies and their distribution channels remain separate to this day.

AMC claims a history going back to 1920. But it really began in 1961 when Stanley Durwood became CEO and hit upon the idea of the multiplex. These smaller suburban locations replaced the big movie palaces of Hollywood’s “golden age.”

But as technology advanced the “shoebox” showed its age. Flat panel TVs and computerized sound made the home experience just as good, or better, than the mSultiplex. Despite innovations like computerized ticketing, between-movie advertising and even “Dine-In” cinema, the business was in trouble long before the pandemic.

Why AMC Stock Wins

The movie business has gone from being a monopoly, an industry with one seller, to a monopsony, an industry with one buyer. AMC is that buyer.

A movie ticket costs $10-$20 for a single show, while a streaming contract costs the same for all the content you want for a month. It’s a better deal for consumers, but a horrible one for producers. As the $2.3 billion box office of Avatar 2: The Way of Water showed, however, there is an appetite for higher-quality theater experiences.

The Hollywood strike is about streaming and its economics, which limits what producers can pay to what they can get from TV viewers. Residuals, which paid talent for years after a show or movie came out, disappear in a streaming environment.  AMC offers the only high-end distribution the movie business has. It’s the industry’s Obi-Wan Kenobi.

How AMC Stock Wins

Before the pandemic AMC was a marginally profitable company with $5.5 billion in 2018 revenue. Now it has 10 times the shares, nearly double the debt, and each share is worth barely one-third of what it was in 2018. AMC has been a horrible investment. If you bought the meme and stayed in the game, you lost.

Aron might eke out a profit later this year if the strike ends quickly. But it’s the monopsony that has the most value. The threat of this $4.3 billion company going under must have everyone in Hollywood quaking in their diamond-studded shoes.

The studios are still unable to buy AMC, under the terms of the 1948 Supreme Court action. None beyond (possibly) Disney (NYSE:DIS) are in any shape to buy it.

But a cloud company could. Meta Platforms (NASDAQ:META) could. So could Microsoft (NASDAQ:MSFT). Neither of these companies owns a movie studio, as Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) do.

The threat of bankruptcy, in the face of a takeover, will keep the trustbusters away from any deal, even one that contravenes the Paramount decision. It’s AMC’s weakness that is its strength. Now that’s a Hollywood ending.

On the date of publication, Dana Blankenhorn held long positions in MSFT, AAPL, GOOGL and AMZN. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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