Mittleman Brothers form 13D amendment – issues letter to Carmike Cinemas, Inc.
Roland C. Smith, Chairman of the Board
S. David Passman, 11], Chief Executive Officer
Carmike Cinemas, Inc.
1301 First Avenue
Columbus, GA 31901-2109
Dear Roland and David,
Mittleman Brothers, LLC (“Mittleman Brothers,” “we,” or “our”), as the largest shareholder of Carmike Cinemas, lnc. (“Carmike” or “CKEC”) with a 7.1% stake, as stated in our Schedule 13D filing on March 8, 2016, described our opposition to the terms of Carmike’s definitive merger agreement with AMC Entertainment Holdings, Inc. (“AMC”), which would see Carmike’s stock sold to AMC for $30 per share in cash. We believe that, ifapproved, the deal would be immensely favorable to AMC’s shareholders and grossly unfair to Carmike’s shareholders. We reiterate our intent to vote against this deal in its current form, and to encourage all CKEC shareholders to also vote “No.” Mittleman Brothers does not intend to solicit proxies at this time.
On March 10, 2016, Carmike filed a Schedule 14A (“14A”) with the SEC, which included statements that we believe attempt to obfuscate the relatively low valuation at which Carmike’s Board agreed to sell Carmike to AMC. Further, we believe certain claims made by Carmike in the 14A are inconsistent with previous Carmike filings and that CKEC changed its definition of“adjusted EBITDA” in an apparent attempt to mask a low buyout valuation.
Carmike claims in the 14A filing that the $30 per share cash acquisition price values Carmike at 8.8x adjusted EBITDA. That multiple is substantially higher than the 7.7x adjusted EBITDA multiple we cited in our March 8th letter to Carmike filed with our 13D, and higher than the 8.ox adjusted EBITDA multiple that AMC implies they are paying Carmike by claiming, on page 4 of their acquisition presentation, that the $1.1B Enterprise Value, with annual synergies of $35M, yields a “Synergy adjusted Enterprise Value / LTM adj. EBITDA purchase multiple of 6.5x” (filed 03-04-16, link). It appears inconsistent for the acquirer (AMC) to claim to be paying 8x EBITDA (6.5x post synergies), while the seller (CKEC) claims to be receiving 8.8x EBITDA. Further, it appears Carmike arrives at this higher EBITDA multiple by applying a new definition of adjusted EBITDA that is different from the industry standard definition that CKEC adopted in Q1 2015 and used as recently as the end oflast month. In a February 29, 2016 press release, Carmike reported “all-time records in Revenue, Operating Income, Theatre Level Cash Flow and Adjusted EBITDA” which cited adjusted EBITDA at $135.1M. Yet the March 1oth 14A filing cited a newly redefined adjusted EBITDA ofonly $126M. This reduced version includes expenses related to stock options and mergers and acquisitions.
That is a departure from the way CKEC’s peer group reports adjusted EBITDA; and Carmike’s reporting method adopted in Q1 2015. Carmike’s CFO, Richard Hare, explained results during a Q1 2015 conference call: “Beginning in Q1 of2015, we began adding back non-cash stock-based compensation expense to determine adjusted EBITDA in an effort to better align our calculation with industry peers and our bank covenants.” M&A expenses were already included.
Why would that conventional definition of adjusted EBITDA, used as recently as February 29“, be dropped on March 1oth for a less favorable version only as valuation is discussed? It appears this “new math,” too contradictory to have come from the good people at Carmike itselfwe suspect, is more likely the work ofinvestment bankers, a profession well known to produce lengthy reports which can argue (for a modest fee of a few million dollars), that based on certain adjustments and assumptions, three is a fair value for two plus two.
Carmike shareholders should not be lulled into a false sense of satisfaction due to what we believe amounts to numerical sleight of hand in an attempt to put what we see as a very poor deal into a good light. We do not argue for one definition of adjusted EBITDA over another, but we do argue for consistency, and that Carmike’s bankers not revise numbers solely to make this unjustifiably low valuation, in our opinion, appear remotely justifiable.
Using this unorthodox adjusted EBITDA figure to derive an 8.8x multiple, Carmike claimed that this proposed transaction is “higher than any comparable, large-scale theatre transaction multiple over the last 10 years.” But at the 8x multiple that AMC implies it is paying, it clearly is not. And, at the 7.7x multiple we believe is accurate (using as-reported adjusted EBITDA and including our estimated value of the Screenvision stake), it would be one of the cheapest buyouts ofa major theater chain in recent history.
Viewed another way, if we applied Carmike’s claimed 8.8x EBITDA multiple to Carmike’s $135.1M in as-reported adjusted EBITDA for 2015, the resulting stock price would be just over $34 per share. Add $5oM or $2.00 per share for Screenvision (our estimate of its value) and the total becomes $36 per share, 20% more than the $30 per share consideration of the currently proposed deal.
Lastly, because the valuations of most comparables (including recent transactions and all of Carmike’s large publicly traded peers in the U.S.) use the industry standard definition of adjusted EBITDA, Carmike’s sudden switch to a different definition of adjusted EBITDA in the 14A creates an “apples and oranges” valuation comparison, which may produce incorrect conclusions.
We cited Carmike’s adjusted EBITDA (using the 2015 definition) in our March 8th letter to Carmike filed with our 13D because most industries use this convention when discussing buying and selling companies. But much more important than EBITDA, which can be manipulated and refigured, is free cash flow [“FCF”), or what Warren Buffett calls “owner earnings,” which is much harder to misrepresent and is what drives real value creation.
The U.S. movie theater industry has long been known to be a slow growing cash machine, generating consistent free cash flow that has proven to be recession-proof (even during the Great Recession of 2007-2009, the movie theater industry barely flinched). That is why movie theaters have attracted smart money owners and private equity firms for decades. Movie theaters generate utility-like, recurring free cash flows, but trade at lower multiples due to the persistent fear (since the advent of television) of their impending demise due to new alternatives for viewing movies (TV, VCR, DVD, Netflix, etc.).
Carmike invests most of its free cash flow on growth-oriented initiatives, like building new theaters, but ifwe deduct only their maintenance cap-ex (what is required to maintain the business at its current level) the discretionary amount of free cash flow becomes apparent.
The equity value of Carmike at $30 per share (the buyout price offered by AMC) is $738M; that is only 12.3x Carmike’s $6oM in FCF. The S&P 500 at 2,050 on March 18, 2016 trades at 18x FCF [2015, source: Bloomberg). To merely match the S&P 500’s current price/ FCF ratio of 18x, Carmike would have to be valued at $44 per share. Meanwhile, under current management, CKEC has vastly outperformed the S&P 500 over the past seven years in sales, EBITDA, and PCP growth, all combined with a recession-proof business profile, versus a much more cyclical earnings dynamic from the S&P 500.
Carmike achieves 39% of its total revenues from high margin concessions (food