DJ UPDATE: Imax Up 6.2%; Begins Sale Process Again >IMAX
Source: DJ
Date: 03/09/06
03/09 15:35 =DJ UPDATE: Imax Up 6.2%; Begins Sale Process Again >IMAX
(Adds analyst comments in last 10 paragraphs and updates stock price.)
By Andy Georgiades
Of DOW JONES NEWSWIRES
TORONTO (Dow Jones)--Along with reporting a 62% jump in earnings, Imax Corp. ( IMAX), known for its giant film screens, revealed it's begun a process to explore alternatives to enhance shareholder value, including a possible sale.
It's a road Imax has gone down before, in 2000, but the circumstances are more favorable to the company this time.
Back then, Imax was trying to accommodate the wishes of its largest shareholder, investment firm Wasserstein Perella Group (now called Wasserstein & Co.), which wanted to sell its stake. But shortly after that process began, the North American theater-exhibition industry experienced unprecedented financial difficulties, forcing many operators into bankruptcy protection. The process was quickly abandoned.
"Fast-forward almost six years later, you have just a much-stronger business model for Imax and a far better environment, not only because of the financial condition of our exhibitors, but because of the trend lines upward in the Imax business and the uncertainty surrounding the conventional 35mm business," Richard Gelfond, co chief-executive of Imax, told Dow Jones.
The addition of Hollywood content to the Imax network, which was famous for its animal and nature documentaries, has been the key to the company's turnaround. Imax's commercial strategy involved the development of a digital- remastering process that allows it to convert standard films for exhibition on its giant screens, as well as a lower-cost film system aimed at multiplex operators, dubbed Imax MPX.
While conventional theaters saw a 6% drop in box-office revenue last year, Imax's Hollywood film releases last year, which included blown-up renditions of "Batman Begins" and "Charlie and the Chocolate Factory," saw a 35% increase.
On Nasdaq Thursday, the stock is up $0.59, or 6.2%, to $10.09 on about 5.0 million shares. The stock has traded as high as $10.95 Thursday.
Gelfond said the most recent financial results show that the building blocks of the business model are in place with respect to getting the support of Hollywood and rolling out MPX theaters. And a strategic or financial partner can help take Imax to the "next level" in a variety of ways, such as providing additional capital, accelerating its joint-venture theater strategy, helping develop new technologies, and extending its marketing reach.
"We think that bringing in the right partner right now increases the speed and the certainty with which we could build Imax into a significantly bigger enterprise," he said.
The latest financial results were impressive. As reported, 2005 net earnings at Imax were 40 cents a diluted share, up from 26 cents in 2004 and ahead of its guidance of 35-38 cents. In addition, it's assembled its strongest film slate ever for 2006 - six Hollywood features including Warner Bros. Pictures "V for Vendetta," "Poseidon," and "Superman Returns," with a major release coming every six to eight weeks. The three other Hollywood offerings will be in Imax 3D, the latest announcement being "Open Season," the first such film from Sony Corp.'s ( SNE) Sony Pictures Animation unit.
Imax didn't provide any guidance for this year, given the process to explore alternatives, except to say it sees installing 38-45 systems, up from 34 in 2005.
The potential of 3D could be a big selling point for the company. Imax's 3D version of "The Polar Express," shown exclusively in the Imax network, grossed about $45 million in its first release, and another $15 million in its re- release. By comparison, Walt Disney Co.'s (DIS) "Chicken Little," which was released in November on digital 3D screens, only grossed about $8 million on about the same number of screens as the first run of "The Polar Express."
"We think digital is a fine technology in 35mm, but not particularly a threat to Imax," Gelfond said, adding that Imax is working on its own digital format that would be beneficial in terms of saving money on prints and showing live content.
A reason Imax went public with the process - it's hired Allen & Co. and UBS Investment Bank as its financial advisers - is because it sees interest from a " broad array" of potential suitors, and has already been approached by some.
"We just don't know where the best fit is, and we want to have the broadest sort of field to play on," he explained.
But he also stressed that Imax is going into this process from a position of strength, with record earnings and theater signings, which means there's only going to be a sale if it makes sense. The company's co-CEOs, Gelfond and Bradley Wechsler, own about 12% of the company's outstanding shares.
The pair celebrated their 12th anniversary with Imax last week, and remain " excited" about Imax's future. While they would like to continue running the company if it finds a partner, they also understand that the partner may have a different agenda.
"But our first choice would be to be part of (Imax)," Gelfond said.
Eric Wold, analyst at Merriman Curhan Ford & Co., said Imax's decision to enhance value isn't a surprise given how "incredibly cheap" the stock price is compared to the company's potential.
He thinks one of the Hollywood studios is most likely to be a bidder, for a couple of reasons. One, the studio could choose the best time slots for releasing films in Imax without having to compete with other studios. Two, studios may start thinking about how much they'll have to pay Imax in the coming years as part of box office revenue-sharing agreements.
"As the Imax screen base continues to grow, that's going to become a pretty significant number," he said.
Wold owns Imax stock; his firm has had an investment-banking relationship with the company.
Marla Backer, analyst at Soleil Research Associates, agreed that any of the studios are potential suitors, and Warner Bros. is at the top of the list given it's released the most number of films with Imax.
However, a technology company, specifically one that's interested in the entertainment industry and using Imax "as a springboard to other things," also makes sense, she said. A couple of names that came to her mind were Intel Corp. (INTC) and Microsoft Corp. (MSFT).
While management has done a good job on its own, she said executives have stated in the past that a partner could accelerate its ability to roll out Imax systems.
She noted that management has high expectations for the business, as evidenced at an analyst day last year, in which the company shared a theoretical model that had it generating share earnings of $1.45 by 2008. And she believes they're still thinking along those lines.
Backer added that the co-chief executives may also be frustrated with the stock price. "I think they feel that they're very much executing on their business plan and the stock doesn't always reflect that," she said. "I don't think it in any way signifies they can't do it on their own, but that they can't do it as quickly or aggressively perhaps."
Backer doesn't own Imax stock; her firm doesn't do investment banking.
-Andy Georgiades, Dow Jones Newswires; 416-306-2031; andy.georgiades@ dowjones.com
(END) Dow Jones Newswires
03-09-06 1535ET
Copyright (c) 2006 Dow Jones & Company, Inc.
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