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January 16, 2007

National Cinemedia IPO Ready To Go: Should Be Good For Regal

One of the reasons that Regal Entertainment (RGC) shares have risen 10% since mid-December and consistently been on the 52 week high list is the pending IPO of its 41% owned joint venture, National Cinemedia (NCMI). NCMI completed a filing last week indicating that the IPO is imminent.

I think NCMI is an attractive investment if priced within the IPO range of $18-20. NCMI is the largest in-theatre advertising company in the world with affiliation agreements with its joint venture partners, RGC, AMC Entertainment, Loews Cineplex, and Cinemark. These four companies dominate the U.S. theatre business with about 40% of the total theatre locations and screens. For valuation purposes analysts are comparing NCMI to internet advertising and outdoor advertising stocks given the similar revenue growth and operating margin profile.

NCMI will have about 94 million shares outstanding plus $735 million in debt for a total enterprise value of $2.5 billion. Assuming 2007 EBITDA of $185 million, the EBITDA multiple is 13.6 times, in line with or slightly below the peer group.

More importantly from my perspective as an RGC long is the impact on RGC's valuation.....

According to the NCMI prospectus, NCMI will pay its current owners $686 million for "agreeing to modify payment obligations under existing service agreements." Current owners are also entitled to the IPO proceeds, estimated at about $700 million.

RGC currently owns 41% of NCMI. This means that RGC will receive $577 million in cash proceeds upon completion of the NCMI IPO ($281 million of the service agreement payment and $296 million of the IPO proceeds). This works out to $3.84 per share. If past precedent holds, RGC is likely to payout most of these proceeds directly to its own shareholders in a special one-time dividend.

RGC will also continue to own 24% of NCMI after the deal. Assuming the shares trade at the IPO price, this represents additional value of $428 million, or $2.85 per RGC share. Over time I would expect these shares to be liquidated, setting up the potential for further special dividends to RGC shareholders.

Deducting the NCMI value from RGC's current valuation leaves RGC shares trading a little under 8 times 2007 estimated EBITDA. I think that is about the right public valuation for RGC shares although if RGC's controlling shareholder, the Anschultz Entertainment Group, ever decided to sell, private equity would pay a premium. I would not predict a privatization of RGC but given the current thirst of private equity groups for acquisitions, the steady cash production of movie theatres, and prior successful LBO experience with theatre companies, it is not out of the realm of possibility.

At 8 times 2007 EBITDA adjusted for the NCMI IPO, RGC shares would trade at approximately $23.50, in line with my long standing target of $23-24. I think the recent momentum in RGC shares will be sustained as the NCMI IPO is completed later this quarter and as investors look forward to a record breaking box office in May when the third installments of Pirates of the Caribbean, Shrek, and Spiderman hit theatres. These are three of the most popular franchises of all-time and investors might see RGC shares as a way to play their openings. If so, RGC shares might temporarily trade to 9 times EBITDA, or $26.70 per share. Given a revised target of $23.50 to $26.70 and the support provided by the 5.4% current yield, I plan to hold RGC shares for a few more months.

Posted by Steve Birenberg at January 16, 2007 03:34 PM in RGC