Business Context and Reporting Period
This Form 8-K filing by National CineMedia, Inc. (NCM, Inc.) and National CineMedia, LLC (NCM LLC) reports on events occurring between December 28, 2012, and June 7, 2013. The primary event is an extraordinary Common Unit Adjustment triggered by Cinemark Holdings, Inc.'s acquisition of Rave Cinemas on May 28, 2013. This acquisition resulted in an attendance increase exceeding the 2% threshold required to trigger an adjustment under the Common Unit Adjustment Agreement.
Key Financial Metrics and Capital Structure
The filing details the valuation and capital structure used to calculate the unit adjustment as of May 28, 2013:
- NCM LLC Enterprise Value: $2,713,324,512
- NCM LLC Equity Value: $1,843,582,854
- Long-Term Funded Debt: $884,000,000
- Cash and Cash Equivalents: $14,258,342
- NCM, Inc. Share Price (60-day weighted average): $15.8032
- Enterprise Value per Attendee: $4.0520608
- Value of Aggregate Net Attendance Adjustment: $84,007,235
As a result of the adjustment, 5,315,837 common membership units were issued to Cinemark. Additionally, $0.64 in cash was paid to Cinemark in lieu of a partial unit.
Material Changes Versus Prior Period
The filing outlines significant changes in ownership structure and network attendance:
- Ownership Changes: Cinemark's ownership interest in NCM LLC increased from 15.98% to 19.63% (+3.65%). Conversely, NCM, Inc.'s interest decreased from 46.92% to 44.88% (-2.04%), AMC's decreased from 16.29% to 15.59% (-0.70%), and Regal's decreased from 20.81% to 19.90% (-0.91%).
- Attendance Increase: The aggregate net attendance adjustment was an increase of 20,731,978 attendees. This included 20,146,144 attendees from the 32 Rave theatres acquired and 412,500 from a newly opened theatre.
- Screen Expansion: A total of 493 screens were added to the network. The average attendance per added screen was approximately 41,701, compared to the 2012 network average of 36,140.
- Contractual Status: 27 of the 32 acquired Rave theatres (400 screens) were immediately included in the long-term Exhibitor Services Agreement (ESA) with a term ending February 13, 2037. Five theatres (83 screens) remain under pre-existing contracts with a third-party provider until November 2018.
Outlook, Management Commentary, and Risks
Management anticipates improved financial performance due to the integration of the acquired theatres:
- Revenue and Margin Impact: Cash flow and margins are expected to increase due to higher beverage revenue and a shift from a lower-margin affiliate revenue share expense structure to a higher-margin founding member theatre access fee expense structure.
- Integration Payments: For the five theatres currently under third-party contracts, Cinemark will pay NCM LLC integration payments approximating the net cash NCM LLC would have generated. These are projected to be approximately $0.5 million for the partial year of 2013 and $0.8 million for a full year. These payments will be recorded as intangible assets but added to available cash distributions.
- Divestiture Risk: One of the five theatres under the third-party contract, along with three other acquired Rave theatres (52 screens total), is subject to divestiture by the Department of Justice. The attendance from these divested theatres will reduce the attendance used for the 2013 annual Cinemark Common Unit Adjustment in early 2014.
- Settlement Date: The common membership units are expected to be issued on June 21, 2013.
Key Facts for Investor Verification
- Verify the final settlement of the 5,315,837 units issued to Cinemark on June 21, 2013.
- Monitor the Department of Justice's final determination on the divestiture of the four Rave theatres (52 screens) and the impact on future attendance calculations.
- Track the quarterly integration payments from Cinemark for the five theatres under third-party contracts to ensure they meet the projected $0.8 million annual run-rate.
- Confirm the impact of the shift from affiliate revenue share to theatre access fees on reported margins in subsequent quarterly reports.
- Review the 2013 annual Common Unit Adjustment in early 2014 to see the reduction in attendance figures due to the divested theatres.