Running head: THE BUYOUT OF AMC ENTERTAINMENT 1

The Buyout of AMC Entertainment

Name

Institution Affiliate

Course

Date
THE BUYOUT OF AMC ENTERTAINMENT 2

Introduction and Case Brief

In 2004, JP Morgan Partner, the private equity of JPMorgan Chase & Co, was

considering going public to private for AMC entertainment Inc one of the leading theater

companies in the United States. The buyout came at a time when the leverage buyer (LBO)

market started to recover from a decline that was experienced between 2001 and 2002. Even

though the LBOs market had recovered after the great depression, the market experienced less

LBOs, fewer ideal targets, more intense competition, and less leveraged capital structure.

Moreover, the buyout also coincided with a period when there was a gradual recovery in theater

attendance since the 9/11 event.

Although AMC entertainment Inc had proven to be an attractive buyout candidate, JP

Morgan Partner had to make sure that the following two factors were addressed. The premium JP

Morgan Partner could offer above the current AMC entertainment Inc price of $16 per share and

still make its targeted return. The private equity also needed to determine the lowest price that

would be offered to Apollo Management- who held 94% of series A shares that could be

converted to Series B- to make the firm interested in the deal considering its shrewd investment

strategies. Lastly, the price JP Morgan Partner will offer to AMC Entertainment Inc shareholders

in order to get the targeted return of 20% to 25%. In this paper, we are going to determine the

price that will interest Apollo Management and allow the JP Morgan Partner to make the

required return. The analysis will be done in an excel file and the result presented in this report.

The table below shows the price that should be offered to AMC Entertainment
THE BUYOUT OF AMC ENTERTAINMENT 3

Offer Price 28.78

Value 2,486,519

less LBO Debt (455,000)

less Holdco Notes (169,900)

less Cash (333,248)

plus, Expenses 1,551,646

Required Equity 3,080,017

Table 1: Calculation of The Proposed Price

From table 1 above, JPMP should propose to buy AMC Entertainment at $28.78 per

share; however, the proposal will not be attractive to Apollo Management; it will enable the

company to earn the required rate of return, which is between 20% to 25%. The offer price

represents a 79.87% premium from the current market price of $16 per share. To do this, the

JPMP will need to pay $3.08 billion to buy 8.64 million shares. The transaction will result in an

IRR of 25% on the transaction. Since the price is lower than what Apollo Management accepts,

the JPMP will manage to convince the firm to stay and become a managing partner.

The IRR is calculated as follows

0 1 2 3 4 5
(850,000) 80,219 89,499 107,409 127,504 148,092
          2236228
           
IRR 25%        
Table 2: Calculation of IRR

Apollo Management is known for its shrewd investment strategy whereby they will only

accept the deal when the price exceeds a particular point; otherwise, they will likely reject the

offer. The firm has a reputation of being an active investor and will be ready to accept any offer

if the proposal exceeds a specific amount. Therefore, JPMP needs to strike a balance between the
THE BUYOUT OF AMC ENTERTAINMENT 4

lower price that will enable them to earn the required rate of return, in this case, 25%, while

ensuring that the price is high for Apollo to accept the offer.

The 79.87% increase in the current market price will ensure that JPMP strikes a

balance between the targeted earning and the price acceptable to Apollo Management. In order to

achieve this, the company revenue and EBITDA must continue growing at the current rate of

3.3% and 4%, respectively. As the revenue and EBITDA increase, the value of AMC's will

approach its peer such as Regal and Carmike Cinema, with EV/EBITDA of X9.24. The

EV/EBITDA will exceed its competitors since its high-quality assets and theater are better

positioned than its competitors.

If the AMCE accepts the offer, the JPMP will have the opportunity to control the

company affairs through its board, which will enable the equity firm to solve the bottleneck that

has been inhibiting the company from performing. As a result, the company will likely perform

better compared to the current result, which is inhibited by excess capacity and complicated

capital structure.

Therefore, the JPMP should offer $28.78 to AMCE Entertainment, ensuring that the

company capital structure has been rectified and bring the company valuation closer to its peers.

However, the price will not be high enough to entice Apollo Management to take the offer, and

therefore, JPMP should welcome the firm as their partner who will bring on board the reputation

of investing in the viable companies.

Reference
THE BUYOUT OF AMC ENTERTAINMENT 5

Chaplinsky, S., Oppenheimer, S., & Patra, V. (2017). The Buyout of AMC

Entertainment. Darden Business Publishing Cases.