Flagging a potentially interesting situation: IMAX China (HKG: 1970) (Update)

Coming to your local theatres soon...

Correction: I made a mistake on the date for which an offer can be proposed again - presuming it was July - the actual date would be the day the offer lapsed, which would be 12 October.

HKG:1970 - even the ticker is all flavors of nostalgia, perfectly capturing a major facet of the cinematic experience … cinemas… ahhh … exactly what we will be covering today.

This is a really simple idea.

IMAX should be no stranger to film-lovers; especially after the release of Nolan’s Oppenheimer last year, I reckon most would be familiar with the IMAX system.

The setup here is simple.

IMAX Corp, listed on the NYSE, is a 71% shareholder of IMAX China, a HKEX listed subsidiary - in charge of the release of IMAX films in Greater China.

IMAX HK is rather illiquid - 7.15 HK is a mere $0.93 USD - with no investor presentations, no earnings calls - again, as is common with ideas in this blog, we are dealing with a company that is more or less “unownable” for most, flies under the radar, and therefore sports a, for a lack of a better word, shite valuation.

Whilst IMAX Corp, the parent company, trades at ~8x EBITDA, the “backwater” subsidiary IMAX HK, trades at a mere ~5x EBITDA, despite margins being more than 10 pts higher.

In fact, from a pure valuation discrepancy reason, management has indeed indicated in times past that the valuation multiple for IMAX HK is way too low and hence, it doesn’t make sense as a standalone entity especially given that the initial objectives for public listing have been met.

So on 13 July 2023, a scheme of proposal was initiated, whereby an offer of HK $10 was proposed - with a boxed-in clause - that the offeror will not increase the offer price i.e. take it or leave it - and that if the offer were to be rejected, minorities would have to endure a 12 month “winter” before a new offer could be proposed.

A scheme of arrangement can only be approved if i) 75% of disinterested/minority shareholder approve of the transaction and ii) if not more than 10% of disinterested/minority shareholders reject the transaction.

Of the ~90-100m minority shares, approximately 61% voted - which is the votes that matter - a “no show” would not count as a vote against/for.

The obstinate HK$10 offer ultimately met its demise with 70% voting in favor of the transaction (falling short of the 75% acceptance threshold) and a staggering ~18% voting against the transaction (exceeding the 10% rejection threshold) i.e. minorities felt that HK $10 was simply not that great an offer worth accepting.

Where are we now?

We are approximately 2 months away from the anniversary of the initial proposal. Management made a mistake by playing hardball with that clause - at HK $10, IMAX had to pony up ~120m for the minority stake. Adding perhaps another dollar or two per share would have probably pushed the deal past the finish line - another ~20m on top of the extant offer, a small sum considering IMAX sports a ~1bn market cap and would only require 1 year of EBITDA to cover the entire deal (~140m).

The strategic rationale remains intact, as management elucidated from last year’s conference call - i) cost savings of ~2m, ii) tax efficiencies and access to offshore cash, iii) reducing valuation complexity for the entity.

What I believe will happen

In their recent Q1 24 earnings call, IMAX’s management stated that some cost cutting work has been done and the way I’m reading it, it seems like IMAX does seem to be interested in returning again, worded in a rather “coquettish” manner of course.

In my mind, management has just gone about doing the cost cutting in a different order - rather than subsuming the entity first (which was the ideal), perhaps subsuming the entity will be the final brush, as will happen by end of this year.

To further solidify why I feel IMAX HK will imminently receive an offer again, check out this latest announcement:

I find it rather odd that in light of the backdrop I laid out above, IMAX HK will eliminate the CFO/COO positions - almost a “smoking gun” of sorts that IMAX HK will cease to exist soon.

Valuation

Say IMAX were to pay HK $12 for the subsidiary, they would be paying an undemanding 9x 2023 EBITDA (I added the 2m of public-listing cost savings, not inclusive of tax savings); adding back tax efficiencies and other potential savings would bring this down to an 8+ x EBITDA multiple, roughly in line with where the parent co trades at the moment.

Other Notes

IMAX has regained market share in China so the outlook remains positive.

Douglas (Indep director) owns ~17% of the company and IMAX’s CEO ~1% of the company so they are incented to do what’s right for the company - especially if simplification of the corporate entity could improve valuation for the parent company.

Management has stated that the opportunity cost against the privatization would be share repurchases at the parent entity. IMAX parent has repurchased shares at an average of ~$15.24 which at current EBITDA figures would be ~7.6x EBITDA; but EBITDA really only recovered the last year or so and thus, the actual blended multiple would be higher. In other words, even paying a price of ~11-12 for the HK listed subsidiary, as I have shown earlier, doesn’t entail that big of an opportunity cost to prevent management from dishing out said offer.

Moreover, as all things in life, it takes two to tango. The stock price has been absolutely abysmal since the deal broke - who the hell wants to own this entity after such a rubbish offer - the stock has simply traded sideways post deal break and will continue to do so. In other words, if management could show some negotiation leeway, spice it up a buck or two, I reckon minority holders will be happy to release the bird in their hands and the two parties can part ways in peace.