Fitch Ratings has assigned
Fitch has also assigned 'BB'/'RR1' ratings to Cineplex's
Cineplex's Long-Term IDR reflects the company's 75% share of the Canadian box office market, diversified revenue profile, effective monetization of its entertainment ecosystem and a solid attendance recovery trend since 2Q23. The rating is constrained by Cineplex's smaller scale, lower historical adjusted EBITDA margins and free cash flow generation relative to
Key Rating Drivers
Leading Market Share and Film Distribution: With a 75% share of the Canadian box office market, Cineplex has a solid market position that enables operating efficiencies and cost advantages at its theaters and location-based entertainment venues. This translates into theater-level cost-savings, maximization of revenue per patron, multiple movie format experiences for all budgets, granularity of market demographics and distribution leverage with film studios. Cineplex's diversified business mix goes beyond the traditional movie exhibition model by clustering non-movie entertainment options and media services, marking a difference versus other pure-players in the region, such as Landmark Cinema or Guzzo Cinemas.
Highly Dependent on Film Studio Production: Movie theater exhibitors rely on the quality, quantity and timing of film production, which are beyond management's control. Throughout the pandemic, film studios delayed theatrical releases while redirecting certain titles to their own DTC offerings, with options ranging from day-and-date simultaneous releases on DTC platforms and theaters to theatrical releases only. Studios have since returned almost exclusively to theatrical releases of new films, although with a shortened theatrical window allowing for earlier transition to DTC platforms.
Fitch believes that theatrical exhibition will remain a key attribute for film studios' large film releases (tent poles) going forward. Studios have said that theatrical exhibition allows for franchise branding, revenue opportunities and ultimately film longevity, helping to offset the high production and marketing costs of these projects.
Diversified Entertainment Ecosystem: Cineplex's business strategy focuses on providing customers with many entertainment options while optimizing and diversifying its revenue mix and operational risks. Cineplex's diversification strategy evolved from geographical expansion, enhanced VIP movie theater experiences, expanded food offerings, and liquor service at selected cinemas. Cineplex offers non-movie entertainment options at its location-based entertainment (LBE) venues including
Through its alternative programming, Cineplex offers international and non-theatrical content (e.g. Bollywood, sporting events and concerts) that rarely finds a home in the traditional national-chain multiplex. This reduces its dependence on
In 2023, Cineplex generated 43% of total revenue from Box Office (versus 59% in 2012), 35% from Food Service, 9% from Media and 13% from Amusement and Other.
Disrupted Film Production Cycle and Attendance Recovery: As a result of the pandemic and subsequent supply chain challenges, the film industry experienced a significant extension in the typical film creation cycle timeline (averaging about 31 months). Since the re-opening , theatrical films released in
Fitch expects FY24 and FY25 to be crucial years for the industry with studios streamlining content-creation cycles and returning to a more normalized theatrical release schedule.
Deleveraging Capacity: EBITDA leverage has significantly improved to approximately 4.7x (pro forma as of
Derivation Summary
Cineplex's ratings reflect its scale and market position as one of the largest entertainment companies in
Key Assumptions
For FY24, Fitch assumes a low-to-mid single digit decline in attendance as result of about
Fitch estimates box-office per patron at a low-single digit decrease in FY24, following the announced delays and rescheduling of film content. From FY25 and on, a low-to-mid single digit growth, assuming stable market conditions.
Concession per patron gradually increasing to 4.5% by the end of the projection, reflecting support from increased premium food offerings and expanded liquor license across locations.
The food delivery service is assumed to grow at low-single digit, assuming a modest but consistent demand from moviegoers at home.
LBE food service is assumed to grow at a mid-to-high single digit rate, supported by additional locations across
Adjusted EBITDA margin for the
For the Media segment, a mid-to-high revenue growth digit was assumed throughout the projection, in terms of EBITDA margin fluctuating from 52.7% to 55.0% by the end of the projected period.
For the Amusement segment, we assumed the announced new LBE locations starting operations in FY24, growing revenue at a low-to-mid single digit rate, while EBITDA margins were maintained at current levels around low-to-mid-twenties.
Corporate overhead of 4.5% of revenues for FY24, gradually increasing to 5.0% in FY25 until the end of the projection.
Effective tax rate at 25% throughout the projected period.
Capex intensity at 5.50% in FY24 to reflect the investment in the new LBE locations to open in FY24. From FY25 and on, a 4.5% per annum.
Recovery Analysis
The recovery analysis assumes Cineplex would be considered a going concern in bankruptcy and that the company would be reorganized rather than liquidated. Fitch has assumed a 10% administrative claim.
Adjusted EBITDA: Cineplex's going-concern EBITDA is based on a run-rate consolidated Adjusted EBITDA of
For the Media and Amusement segments, Fitch maintained a 15% decline in revenue but with a 30% and a 20% decrease in Media and Amusement margins, respectively. This results in a GC EBITDA of
Prior recessions provide little precedent for a stress case as theatre attendance increased in six of the last eight recessions due to the fact that theatrical exhibition is a relatively cheap form of entertainment. However, the rise of alternative distribution platforms and streaming subscription plans with attractive entry-level offerings (e.g.
Multiple: Fitch employs a 5.5x enterprise value multiple to calculate post-reorganization valuation, roughly in-line with the median TMT emergence enterprise value/EBITDA multiple, and incorporates the following into its analysis: (1) Fitch's belief that theater exhibitors have a limited tangible asset value and that the business model bears the risk of being disrupted over the longer-term by alternative distribution models (e.g.
AMC purchased
Fitch estimates an adjusted, distressed enterprise valuation of
Debt: Fitch assumes a fully drawn revolver in its recovery analysis since credit revolvers are tapped when companies are under distress. In addition, the company has
For Fitch's recovery analysis, leases are a key consideration. While Fitch does not assign recovery ratings for the company's operating lease obligations, it is assumed the company rejects 15% of its remaining
Cineplex had
Under this scenario, the recovery value for the
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Significant improvement in EBITDA margins in the low-to-mid teen digits, higher revenue and EBITDA contribution from its Media and Amusement segments, driving a higher free cash flow generation and notably increasing the scale of the company;
EBITDA leverage sustained below 5.5x and EBITDAR leverage sustained below 6.25x;
FCF margins sustained in the low-to mid-single digits.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
EBITDA leverage sustained above 6.5x and EBITDAR leverage sustained above 7.25x;
Significant deterioration in Cineplex's liquidity position;
Increasing secular pressure as illustrated in sustained declines in attendance and/or concession spending per patron.
Liquidity and Debt Structure
Adequate liquidity: As of
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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