Cineworld shares set to slump after AMC-Universal deal

Shares in Cineworld look likely to return to March lows after AMC Entertainment and Universal Pictures sign deal that reduces films run times in theatres – overhauling an old business model that could hurt cinemas earnings.

The deal essentially shortens the exclusivity of all films produced by Universal Pictures and Focus Features from 75 days in theatres to just 17days, after which the studio is allowed to screen its titles across premium on demand (PVOD) platforms like Netflix, Amazon Prime Video, Disney+ and Hulu.

This new arrangement means that film fans will only have to wait a two and half weeks rather than months to watch their favourite movies from the comfort of their home, which could see the popularity of cinemas wane.

‘The theatrical experience continues to be the cornerstone of our business,’ Universal Pictures chair Donna Langley said in a statement.

‘The partnership we’ve forged with AMC is driven by our collective desire to ensure a thriving future for the film distribution ecosystem and to meet consumer demand with flexibility and optionality,’ she added.

AMC-Universal deal represents ‘paradigm shift’, says Morgan Stanley

The new deal between AMC Entertainment and Universal Pictures is the ‘crystallisation’ of the worst case scenario for Cineworld, according to a recent note from analysts at Morgan Stanley.

The US-based investment bank had previously calculated that the rise in PVOD platforms represents a potential 10% to 30% threat to EBITDA for Cineworld, with earnings likely to be hit even harder this year due to lower-than-expected revenue and profits for cinemas as a result of Covid-19.

Morgan Stanley admitted that other studios and movie theatres were likely to replicate deals similar to AMC Entertainment and Universal Pictures, ‘ending a decades old theatrical model’.

‘AMC is the largest US exhibitor, and it is hard to see this paradigm shift not being replicated by other studios and exhibitors such as Cineworld,’ Morgan Stanley added.

However, AMC Entertainment believes that its deal with Universal Pictures is a win-win situation that will help improve the profitability of both theatres and film studios.

‘We are participating in the entirety of the economics of the new structure, and because premium video on demand creates the added potential for increased movie studio profitability, which should in turn lead to the green-lighting of more theatrical movies,’ AMC Theatres CEO Adam Aron said.

Cineworld shares fall further than Morgan Stanley forecast

Analysts at Morgan Stanley clearly saw the writing was on the wall for Cineworld and its peers back on 1 June, downgrading it to ‘underweight’ and slashing its target price for the stock from 180p to 60p per share.

On 1 June, Cineworld was trading at 79p per share, with Morgan Stanley’s price target representing a potential downside of 24%.

However, the beleaguered cinema chain has seen its share price shed more than 50% of its value since then and looks capable of returning to March lows where it hit 21p per share.

Cineworld is trading at 38p at the time of publication, with the stock down 82% year-to-date.

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