Carmike Cinemas Inc fka CKEC

[Enterprising Investor]

Big Holders Pan AMC’s Bid for Carmike Cinemas (4/23/16)

The $30-a-share offer is low, based on rivals’ valuations; one bull says the shares could fetch $47.25. Also, time to take profits in Colfax.

By David Englander

In early March, Carmike Cinemas agreed to a $30-a-share cash takeover from AMC Entertainment Holdings. Ever since then, the deal, which represented a 19% premium to the stock price, has drawn opposition from Carmike shareholders.

Following the announcement, Driehaus Capital Management bought 8% of the stock (ticker: CKEC), and filed a 13D form with the SEC, asserting that Carmike is worth $43.50 to $47.25 a share to AMC in an all-cash deal. The firm has since raised its stake to 9.9%, making it the largest holder.

Longtime holder Mittleman Brothers, too, filed a 13D, objecting to the deal. About a week ago, Mittleman raised its stake from 7.1% to 8.4%. The firm, Carmike’s second-largest investor, has stated that a $35-a-share all-in-stock offer should be the bare minimum.

Last week, Carmike’s shares, at a recent $30.09, traded just above the offer price, suggesting that investors think there’s a chance the company could receive a higher bid.

The deal values Carmike at 8.2 times 2015 earnings before interest, taxes, depreciation, and amortization. But including synergies, AMC Entertainment (AMC) would be paying only 6.5 times Ebitda. That looks too low. Rival operators Regal Entertainment Group (RGC) and Cinemark Holdings (CNK), trade for 9 and 8.4 times Ebitda. While they have better Ebitda margins, the discount still seems excessive. Carmike shareholders also won’t get a chance to benefit from any upside when the companies combine, because the deal is all cash.

While the two big holders control about 18% of the stock, it’s hard to tell if a majority of shareholders will reject the deal, forcing AMC to either raise its offer or walk away. It’s also unclear if AMC would raise its bid before a vote, which could occur by the end of this year.

In an April 8 report, Topeka Capital Markets analyst David Miller set a price target of $32, writing that the target “promotes the thin possibility that either a private equity shop or foreign buyer comes in with a competing offer.” But he added: “that does not appear likely.”

This column has covered Carmike for years, most recently recommending the stock in December, as one of our top picks of 2016. The shares are up 40% since our story ran. To be prudent, investors might want to book some profits, here, but hold on to the majority of their shares, on the chance of a sweetened offer. However, we wouldn’t buy more.

Regal and Cinemark aren’t likely to make a bid. Regal might have antitrust concerns, and Cinemark appears focused on faster-growing, international markets. Private equity, meanwhile, might be deterred by the $30 million breakup fee.

Last month, Carmike disclosed that AMC had offered $37 a share for it in March 2015, 60% in cash and 40% in stock. This is notable, because in 2014, Carmike generated only $98 million in Ebitda, versus $135 million in 2015. AMC withdrew the offer, but it could indicate a willingness to pay more now.

Carmike CEO David Passman declined to comment.

Carmike’s December quarter earnings, released on Feb. 29, were better than had been expected, with Ebitda 60% above the year-earlier level. The shares rallied 14% over the following few days, ending at $25.11 on March 3, just before the deal was disclosed. So there shouldn’t be much downside if the deal collapses.

Chris Mittleman of Mittleman Brothers contends that “$30 is where the stock should be on a trading basis, if not higher, and where it would be trading, I think, if AMC had not made their offer at this point. There is simply no discernible control premium in this deal.”

IN LATE 2015 and early this year, this column was particularly enamored with the stocks of high-quality industrials, which rely on hard-hit markets like oil and gas, and agriculture. With sentiment at rock-bottom levels, there didn’t look like anywhere to go but up.

We recommended Actuant (ATU), Clarcor (CLC), Valmont Industries (VMI), and Franklin Electric (FELE), among others. All have rebounded nicely. But none has performed as well as Colfax (CFX), up 60% since our January story on the pump and welding-products maker was published. At a recent $32.20, the shares look ripe for profit-taking.

Colfax stock has responded to a more than 50% rally in oil prices from a January low. The company sells its heavy-duty pumps to pipeline firms and to oil producers for use on drilling rigs. It also supplies welding products to oil and gas customers.

Higher petroleum prices should stabilize demand, and cost savings could help, too. Analysts look for earnings of $1.45 a share this year, and $1.62 in 2017. On those estimates, the stock trades for a not inexpensive 20 times earnings.

Analyst expectations are still low. Only four of the 18 Wall Street analysts covering the stock rate it a Buy, but 2016 estimates could rise if Colfax reports strong quarterly earnings on May 3. Even still, there might not be much room for improvement for the shares in the next year or so.

Further out, the stock could move higher, as long as Colfax’s markets rebound. Analysts forecast earnings of $2.15 a share in 2019, which could put the shares in the $40s. But that’s still a ways out. Seems like a good time to lighten up on the stock.

http://www.barrons.com/articles/big-holders-pan-amcs-bid-for-carmike-cinemas-1461386989