Tuesday, June 11, 2013

AIMCo, OMERS Going To The Movies?

Gary Lamphier of the Edmonton Journal reports, European movie theatres just the ticket for Alberta pension fund AIMCo:
Alberta Investment Management Corporation is taking a bold step into the movie business.

The province’s $70 billion pension fund manager and an Ontario-based partner have agreed to acquire one of Europe’s top movie theatre chains for 935 million British pounds, about $1.48 billion Cdn.

AIMCo’s joint purchase of Vue Entertainment with OMERS Private Equity — the investment arm of the $61 billion Ontario Municipal Employees Retirement System — is expected to close in July.

Vue Entertainment, currently owned by London-based Doughty Hanson & Co., one of Europe’s largest independent private equity firms, operates 1,321 movie screens in 146 cinemas across Europe and beyond.

“This took a little longer to close than we thought,” AIMCo chief Leo de Bever told the Journal on Monday, after returning to Edmonton from Europe on Sunday evening. “There are always last-minute (snags) and we’d actually expected it to close on Friday, but these things happen.”

Although the purchase of a cinema chain in recession-racked Europe may strike some as an odd move for AIMCo, which is more typically involved in major infrastructure, resource or real estate investments, de Bever says the deal makes sense on several levels.

“It’s a relatively low-risk transaction. The revenue streams are not cyclically sensitive, so they’re reasonably recession-proof, and the returns will ultimately come from really managing this thing from an efficiency point of view,” he says.

“Europe is a little behind us in terms of having very highly optimized networks for movies, and in Eastern Europe there is still a fair bit of growth potential. They’ve never had these kinds of (modern) facilities, particularly in Poland and parts of Germany.”

Vue Entertainment, described by Bloomberg as the second-largest cinema chain outside of North America, also operates in Britain, Ireland, Denmark, Portugal, Latvia, Lithuania and Taiwan.

Since Doughty Hanson acquired Vue for 450 million British pounds ($713 billion Cdn) in late 2010, the chain has expanded rapidly through a series of acquisitions, roughly doubling the number of locations and theatre screens in its network.

Although the eurozone’s economy has shrunk for six straight quarters, and jobless rates — especially among the young — remain at nosebleed levels, de Bever says theatre box office revenues have remained strong.

The Hollywood Reporter, a respected U.S.-based film industry trade publication, recently reported that European theatre revenues hit a new record high of nearly 6.5 billion British pounds ($10.3 billion Cdn) in 2012, with strong markets in Britain, Germany, Finland and Romania offsetting declines in Italy, Greece, Portugal and Spain.

“I think we got it for a bargain. But it was well priced in the sense that, given all the (issues) about the European economy, but also the incomplete optimization of this particular industry, this represented a medium risk, good return combination,” says de Bever.

Although pay-per-view movies also pose a competitive threat to traditional cinemas, he says the latter option is still preferred by many movie patrons who are seeking an affordable night out on the town.

“When we looked at the market, (going to the movies) competes with a number of other things you could do, and it remains relatively inexpensive,” he says.

OMERS and AIMCo were both familiar with Vue Entertainment, since they had taken a look at the company when it was last on the market in 2010.

“There was some history there and we were familiar with it. So when it became available (again) we quickly got into a private negotiation,” says de Bever.

“Often with these kinds of deals, there is more to it than price. People often have strong views on who they want to end up with this kind of an asset, and that often counts for as much as delivering a big cheque.”

Doughty Hanson opted to put Vue Entertainment back on the market after one of its two co-founders died earlier this year. Tim Richards, the theatre chain’s founder and CEO, will remain with the business, Doughty Hanson says.

“As the company moves forward I am confident that we do so from a position of real strength,” Richards said in a release. “We will continue to build on this success by innovating, enhancing and growing the Vue business through our continuing plan for organic growth supplemented by strategic acquisitions.”
Kristen Schweizer of Bloomberg also reports, Vue Sold to Omers, Alberta Investment for $1.5 Billion:
Vue Entertainment Ltd. was bought by two Canadian pension-fund managers looking to continue the expansion of one of Europe’s largest cinema operators for 935 million pounds ($1.45 billion).

Ontario Municipal Employees Retirement System and Alberta Investment Management Corp. are buying Vue from private-equity firm Doughty Hanson & Co. and the London-based cinema operator’s management, according to a statement today by the three companies.

Vue, which operates in countries including the U.K., Germany and Portugal, has doubled the number of cinemas it owns in the past three years. Chief Executive Officer Tim Richards will retain an equity stake and remain in charge, according to the statement. Vue, which in recent months bought rivals in Poland and Germany, will continue making “strategic acquisitions” where appropriate, Richards said today.

“This is the most active time in Europe for cinema in probably the past 10 years because the banks are back in business and supporting companies and assets” are for sale, he said in an interview.

The deal should close at the end of July, according to the statement. The Ontario pension fund, known as Omers, and Alberta Investment plan to use their own funds to finance the buyout before finalizing debt financing by early August, according to a person familiar with the deal who asked not to be named as the details are private.

James Devas, a spokesman in London for Omers, declined to comment on the debt financing.
‘Patient Capital’

Vue is the second-largest cinema operator outside North America and has more than 1,300 screens at 146 cinemas across Europe, according to the statement.

“People have suggested that” an acquisition of Odeon and UCI Cinemas Group Ltd. “may be the next step in a consolidation,” Aimco CEO Leo De Bever said in a phone interview from Edmonton, Alberta. “But we’re not in any discussions on that one.”

Omers approached London-based Odeon in 2011 with BC Partners Ltd. to purchase the chain, two people familiar with the plan said at the time. The pension funds may run into regulatory issues if they seek to acquire Odeon because of the large market share it would command, De Bever said.

“Presumably, if you had that kind of concentration, you might get a bit more push back from the regulators,” De Bever said. “That’s not on the table right now.” He doesn’t expect there to be any regulatory issues in the Vue deal.
Canada Pensions

Omers is one of Canada’s largest pension funds with more than C$61 billion ($60 billion) in assets. Alberta Investment has more than C$70 billion under management, according to the statement.

“Our combined ownership gives Vue the distinct advantage of patient capital and deep pockets for organic and acquisitive growth,” Mark Redman, the head of Europe at Omers Private Equity, said in the statement.

Doughty Hanson bought Vue in November 2010. The disposal is the second from its Doughty Hanson V fund after the sale of Norit, a maker of water-purification systems, the company said. The firm is in the process of raising about 2 billion euros ($2.6 billion) for its sixth buyout fund, Doughty Hanson VI. It will be the firm’s first fundraising since the death of co-founder Nigel Doughty in February 2012.
And Elizabeth Pfeuti of aiCIO reports, AIMCo, OMERS Take Cinema Chain on Second Attempt:
A pair of giant Canadian investors has bought a UK-based cinema group some two and a half years after their initial bid for the company.

The Alberta Investment Management Corporation (AIMCo) and the Ontario Municipal Employees' Retirement System (OMERS) and have agreed terms with private equity leader Doughty Hanson, the company which beat them to buy Vue Entertainment in November 2010.

The deal will see the Canadian duo commit £935 million to the acquisition, more than double the £450 million paid by Doughty Hanson, the company announced today.

To warrant this increased price tag, Vue Entertainment has more than doubled in size since the pension consortium missed out initially.

The entertainment firm has been expanded from owning and running 68 cinemas, offering 678 screens and sitting in third place in the UK sector in 2010, to operating 146 establishments with 1,321 screens.

In the period between the two deals, the entertainment company bought similar businesses in Poland and Germany, and shored up its prominence in the UK with the take-over of Apollo Cinemas last year, making it one of the largest in the world.

"I'm constantly building relationships globally because I believe in the power of trust-based relationships. A network of reliable, global partners will help AIMCo get the local knowledge of foreign markets it needs to succeed," the fund's Deputy CIO, Jagdeep Bachher, told aiCIO last year. He added that AIMCo should "become the first stop for companies and international institutional investors seeking a partner to help them become world class organizations."

Last week, OMERS was part of a consortium making its second bid on UK utility company Severn Trent. The firm rejected the approach, saying it undervalued its worth and today the consortium has appeared to give up its chasing of the firm.
I think this is a great deal for AIMCo and OMERS. Leo de Bever is right, the deal is well priced and it's a relatively low risk transaction as the revenue streams are not cyclically sensitive and reasonably recession-proof. Also, in Europe, people love going to the movies as it's a relatively inexpensive way to enjoy an outing.

And as Leo de Bever states, the incomplete optimization of this industry is another reason why the deal represents a medium risk, good return combination. Moreover, Chief Executive Officer Tim Richards will retain an equity stake and remain in charge, which means he will keep growing the business.

Also worth noting box office revenue in Europe hit a new high of $8.5 billion (€6.47 billion) last year, even as admissions slipped slightly and several territories experienced a major recession-led drop in sales:
Overall, EU theater goers bought 313 million tickets for European movies last year, a 12 percent jump on 2011, and European titles accounted for more than a third (33.6 percent) of overall admissions, a 5.6 percent increase.

That positive news, however, masks the major drops in EU countries suffering from the Euro crisis, particularly in the recession-wracked south. Admissions were down 10 percent in Italy, 6.7 percent in Greece and 12 percent in Portugal. In Spain, admissions fell 5 percent and would have been much worse without The Impossible, which earned more than $54 million locally, the best-ever performance by a Spanish title. Even France, home to Europe's largest theatrical audience, saw a substantial drop in ticket sales, with admissions falling 6.3 percent year-on-year, to 203.4 million.

On the plus side were Germany (4.3 percent increase), Finland (up 19.7 percent) and Romania (up 15.4 percent), with the U.K. holding steady as Skyfall made up for the lack of a Harry Potter title in release last year.
If peripheral economies finally turn the corner and start growing again, this deal will provide growing revenue streams to its new owners. AIMCo and OMERS might also opt to sell this asset down the road at a much higher multiple.

Leo de Bever always talks about "investing between the cracks," finding deals that make sense which others are not looking at. This was definitely another such deal and even though it took a little longer to close, it was well worth it.

Below, Vue Cinemas 4K on-screen promo created for Vue Entertainment. And Steve Knibbs, Chief Operating Officer at Vue Cinemas, talks about his responsibilities and how he worked his way up from "sweeping floors and handing out popcorn" to a senior management position.