Carmike Cinemas (CKEC) – Bet on higher takeover price – 300%+ upside with options

Investment thesis – bet on higher takeover price from AMC as CKEC shareholder will reject the current offer due to price being too low

Carmike Cinemas (4th largest movie theater company in US) is in the process of being bought by AMC Entertainment (2nd largest). This M&A would create the largest movie theater chain in US with obvious benefits and large synergies for AMC.

Carmike Cinemas trades at $30.47 vs.  current takeover price of $30.00.

Shareholder vote is scheduled for 30th June 2016. Some of the largest shareholders (Mittleman Brothers, Dreihaus Capital)  have indicated that they will vote against the deal. Institutional advisory services (ISS and Lewis Advisors) also issued advice to vote against the deal – passively managed funds (Vanguard and etc.) usually vote their shares based on these recommendations. Summing all votes up (and counting non-voters as “No”) suggest the takeover under current terms will be rejected by CKEC shareholders.

Analysis/presentations by the parties mentioned above suggests that even at $40-$50 share CKEC takeover would be highly acretive to AMC.

 

Potential outcomes

Scenario 1. AMC increases the offer before the shareholder vote on the 30th of June – July ATM and OTM call options offer favorable risk/reward.

Scenario 2. Shareholders reject the current offer. AMC takes time to reconsider and gives higher offer in the coming months. In the meantime other parties might get interested as well - December ATM and OTM call options offer favorable risk/reward.

Scenario 3. Shareholders reject the current offer and AMC looses interest. CKEC starts trading at standalone value – in this case CKEC might revert to pre-merger price of $20/share (merger was announced during the bottom of the Feb market sell-off), however keeping in mind the reluctance to sell by major shareholders, CKEC undervaluation relative to peers and higher number of shares that changed hands at $30/share over the last four months, I see share price stabilizing at $30+. Equity might be the safest way to play this scenario.

Scenario 4. Shareholders accept the current offer – in this case it is a loosing trade, but I see low likelihood of this.

I am personally playing this with Dec call options with $30 strike, which currently trade at $0.8.

 

Further info

Mittleman Brothers presentation - https://dc.aws-sec.akadns.net/Archives/edgar/data/799088/000114036116069523/ex99_1.htm

Dreihaus Capital presentation - https://dc.aws-sec.akadns.net/Archives/edgar/data/799088/000119312516616208/d207937dex3.htm

ISS and Lewis Advisors recommend ‘NO’ vote - http://www.bloomberg.com/news/articles/2016-06-17/carmike-shareholders-should-oppose-takeover-glass-lewis-says

12 COMMENTS

  1. William

    FYI,
    My sources say upside is 31.25-32.35 at best

    1. dt

      Hi William, why do you think it is that low? I doubt 5% boost to the offer price will change shareholder mind. I can argue only with what is in Mittleman and Dreihaus presentations, so you might be more informed than I am.

      1. William

        I am told that if you are a shareholder of record and voted against the deal you may get a kicker in court. Otherwise the deal is likely to pass even with the tow activists voting no.

      2. William

        Think the two major shareholders see no long-term downside to holding out for more (either a No vote – which is unlikely to stop the take over at $30 – but causation for all the other litigation / Delaware valuation tricks) . Valuation is Not stretched and would be accretive at a higher price.

        AMC has been more stoic about an increase (why wouldn’t they be!) but new CEO keeps making noise about how quickly he is taking action! Think Wanda Group is very ambitious as well to make further acquisitions In entertainment space.

        Justice department will only make token recommendations about theater sales so no deterioration In value from asset sales.

        CKEC at mercy of shareholders and AMC – no juice (or ownership of the company)…..unlikely to be able to push AMC higher or dissuade 2 big shareholders.

        Upside $1.25 to $2.25 (very skeptical about much higher than that….downside is $30 ($0.75).. A new price would delay completion probably 45-60 days.

        1. dt

          Thanks, this is helpful. Not so sure about “the deal is likely to pass even with two activists voting no”. My count of votes seems to suggest the deal will be rejected. Only few days left – we will see.

          1. William

            Pretty stern negotiation comments by AMC CEO although if it were so easy to let the deal go by the wayside, why ask CKEC to postpone today’s Special Meeting ???? Perhaps Aron is losing face with his Chinese owners if he needed to bump up the price…..?

            1. dt

              I think the deal is still happening. It is hard to tell if the whole commentary is just theater to affect the shareholders or whether there are real pending decisions behind it. Something should clear up in a week.

              1. William

                Agreed. I think a small bump is in the works

  2. EldarB

    Hello, question: aside from counting Mittleman, Driehaus, and Blackrock, what ownership are you counting to conclude (in excerpt below) that CKEC shareholders will reject AMC bid?

    1. dt

      I am including also Vanguard and c. 15% of non-voters. It might be a close call, in two days we will know.
      Mittleman and Dreihaus have been quite vocal about their thesis and surely have convinced some other institutional investors to vote ‘no’.

      1. EldarB

        non-voters in the last vote of directors were below 10% (2 million shares)

        I considered counting all the trades since early March 2016 at $30 per share or higher for a “no” vote, but that could double-count the non-voters

  3. dt

    Carmike received an increased offer of $33.06 per share. I do not expect a higher offer to come through and shareholders will likely vote in favor of the proposed transaction. This is now merger arbitrage deal with spread expected to narrow over time.

    My Dec calls with $30 strike now trade at $2.4, so a return of 200% on my purchase price.

Comments are closed.