Is National CineMedia Too Big?

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Mon, 05/12/2014 - 11:11 -- Nick Dager

Loews Lincoln SquareLater this week at Loews Lincoln Square on New York City’s Upper West Side National CineMedia will host its annual upfront event to make the case to advertising executives that movie theatres merit a larger share of the billions of dollars they spend each year on ads on television, online and mobile devises. And it seems fair to say that the recently announced NCM-Screenvision merger will overshadow the event. Reaction to the merger news was mixed but everyone agrees on this: if the deal gets government approval, National CineMedia, even more so than before, will be the undisputed leader of U.S. exhibition. The question is, what does this mean for the rest of the industry? Put another way is National CineMedia too big?

The stakes are high. Those major advertisers spend between $60 billion and $70 billion each year and, even though cinema advertising has seen double-digit growth for several years in a row, there is still potential for more. Last year cinema advertising accounted for about .2 percent and exhibitors want more. Now that essentially means NCM.

For anyone who may have somehow missed the news, National CineMedia announced last week that it had entered into a definitive merger agreement with Screenvision for $375 million in cash and stock on a debt free, cash free basis. The merger would create a video advertising network that will cover virtually all of the 210 so-called Designated Market Areas across all 50 states and deliver to approximately 3,900 theatres with more than 34,000 screens, and more than 1.1 billion annual patrons.

When that news was announced National CineMedia’s chairman and CEO Kurt Hall said, “We are very excited about our merger agreement with Screenvision as it will position the combined new company to be much more competitive in the expanding video and overall advertising marketplace, including the new online and mobile advertising platforms. With the investments we will be making to create one more efficient national network, I am confident that we will bring more advertising revenue to our theatre circuit partners and a higher quality pre show to their patrons.”

I spoke with Hall the day after that announcement. When I asked how long this deal had been in the works he said, “This is not a new idea” and told me that the first conversations took place soon after Shamrock bought Screenvision in 2010. “This has been talked about for years,” Hall said and he expressed confidence that the deal would get government approval. “We think we have a very strong message,” he said and he pointed the $28 million penalty NCM will pay if it is not as further evidence of just how certain he is that he will prevail.

What does this deal mean for Screenvision?According to Hall, a $28 million break-up fee will be paid from NCM to Screenvision if NCM walks away from the deal for any reason, or doesn’t get Department of Justice approval. There’s a $10 million break-up fee on Screenvision’s side (which can be increased to $18 million depending on whether they sell the business to somebody else) payable to NCM if Screenvision walks away from the deal. Hall said the DOJ generally takes six months or so to rule in these matters but he was hopeful that approval could come sooner, especially since NCM and Screenvision are relatively small companies.

Hall told me that the deal will have no impact on NCM Fathom’s event cinema business and insists that it’s “a standalone company” owned jointly by AMC, Cinemark and Regal.

On paper this is true. Last December National CineMedia, Inc. the managing member and owner of 46.0 percent of National CineMedia, LLC signed a definitive agreement with its founding member circuit partners AMC Entertainment, Cinemark and Regal Entertainment Group to restructure the ownership of its NCM Fathom Events business.

Under the new corporate structure, Fathom Events is owned and managed by a newly formed stand-alone limited liability company with 32 percent ownership by each of the three circuits (AMC, Cinemark and Regal) and four percent ownership by NCM, LLC. Due to the related party nature of the transaction, NCM formed a committee of independent directors that hired an investment banking firm who advised the committee and rendered an opinion as to the fairness of the transaction.

Contracts are one thing and the real world another. When I suggested to Hall that some people – including me – think that the deal makes NCM too big and might not be a good thing for the industry at large he said he thought I was being too cynical. “This benefits everyone,” he insisted. Screenvision CEO Travis Reid deferred all comments to NCM.

Industry reaction was decidedly mixed but one surprise for me was the number of people who declined to speak about it at all, including anyone at the National Association of Theatre Owners. When I asked a spokesman if he could at least clarify why NATO would have no comment, he replied, “We’re going to leave it at no comment.”

A typical reaction among the people I spoke with came from Mike Curro, president of MovieAdsRus.com who said, “It will make it harder for small cinema advertising companies to do business.”

NCM First LookThere were, however, those who agree with Hall that the merger is a good thing for the exhibition business as a whole. Mark Rupp, president and COO of the Philadelphia event cinema company SpectiCast said, “Consolidation is always good for any industry. It creates more efficiencies, provides for better leverage with vendors, cuts unnecessary costs and almost always results in better choices for consumers.”

“With respect to its impact on the event cinema market place,” Rupp continued, “I don’t think it will have any negative impact on exhibitors and content providers. Event cinema is not only highly competitive already, but there are a growing number of producers, filmmakers and content providers generating new product. I don’t see having one less option for distribution in the U.S. being a problem, as there will remain many choices like SpectiCast, Fathom, Omniverse, Picturehouse, and others.” Rupp acknowledged that having the number one and two firms combine could prove to be a challenge with the Department of Justice and the remaining on-screen advertising firms, however.

Shawn Sullivan, vice president, legal and business affairs, National Amusements echoed that and said, “I suspected that Shamrock was looking to exit, but I didn't see the purchaser being NCM. I wonder if they might run into a monopoly issue. Together, that is about 95-96 percent of the U.S. screens. Not a good sign for any exhibitor that hasn't already tied up a long-term contract.”

Many people in the business did comment but only off the record and an executive at an alternative content company could best sum up their feelings: “I think Screenvision’s event cinema business is going away as an independent distributor. Fathom’s network, through the affiliation with NCM, will certainly get bigger and make them stronger as NCM brings in more advertising screens. Clearance conflicts for event cinema will not go away however. As an example, a former Screenvision client within a 20-mile radius of an existing AMC theater will not get the Met or other event cinema.  In addition, I already see that the Fathom exhibitors have more flexibility to book event cinema now and see it headed that way. As long as we have quality content to offer, I don’t see it as an issue. In fact, I think we might have an opportunity to partner with Fathom going forward.” 

When I contacted NCM by email to ask what impact the NCM-Screenvision merger will have on Screenvision's alternative content business a spokeswoman sent me this reply: “That is yet to be determined…sorry, I don’t have a better answer for you at this time.”

For now “yet to be determined” sums it up as well as anything. Some things, though, are clear. National CineMedia is now, by far, the largest company in the North American exhibition business. It’s a great company run by smart, talented people and it’s fair to say that even they aren’t exactly certain what this will ultimately mean for them or their competitors. Consolidation is inevitable in business and can be a good thing, but monopolies stifle creativity, choices and new ideas. So the question remains: is National CineMedia too big?