Perhaps because this was one of the slower months for new developments on the digital cinema front, the Hollywood Reporter jumped the gun with DCIP and reported that the financing deal was done and that digital cinema was ready to rollout. Bloomberg followed within days with a better researched article. But oddly, there were no supporting press releases from DCIP, Blackstone, or JP Morgan. As it turned out, the HR article was wrong. Not only wrong, but way off.
To be clear, DCIP has not closed its financing at this time. Travis Reid, CEO for DCIP, said DCIP did not participate in the press announcements. (I didn’t press on him that one of his associates was quoted in the Bloomberg article.) While Travis says they are close, he will not make an announcement until the deals are clearly done.
Why did the Hollywood Reporter make its announcement? Some speculate that since the press announcement was made on the eve of NATO’s annual members meeting, there was a connection. Certainly, the news could have been a boost for CBG, in hope that the announcement would make Cinedigm’s pitch for capital look more believable. But that’s a different story for later in this report.
In his comments, Travis did not refute the numbers, saying that these have been public for awhile. But some analysis is due. Both articles say that $200M will be raised in equity, the HR article saying that this will be in part funded by the exhibitors themselves. The remaining funds will presumably be raised through a bond. The bond will likely fund only a phase 1 rollout. A 2nd bond will be floated at a later time when more capital is needed and presumably when better interest rates are possible. Regardless of how solid one might feel that the motion picture industry is, virtual print fee financing has a lot of moving parts that an investor will interpret as risk. After all, the only other company to have financed a large number of digital cinema installations hasn’t done well in terms of stock performance. Once DCIP’s recoupment process has been in operation for awhile, it will be possible to report actuals versus projections, making the final finance package easier to sell.
A major point missed in the articles is the strategy behind the formation of DCIP. DCIP exists to hide the considerable equipment debt from the balance sheets of the public companies that jointly own the entity. (Of the three partners in DCIP, AMC is the only company that is still privately owned.) To hold the debt without a guaranty by the three exhibition partners requires that either the equipment be accepted as the sole collateral in the deal (unlikely), or that DCIP itself puts up its equity as a partial guaranty (more likely). Following this thinking, the equity will not be available for equipment purchases if it is to back the bond. Blackstone has long been the entity with whom DCIP has been working to put the equity piece together. If one assumes that the Bloomberg article has the better numbers, then DCIP is raising $200M in equity, and $525M for phase 1 equipment funding.
$525M can buy lots of equipment, but not enough to buy 14,000 screens worth. There are several variables. The cost of equipment may differ among the three circuits. Deployment agreements typically limit recoupment from studio funds to at most 80% of equipment costs. In addition, deployment agreements place a cap on recoupable equipment costs. Among the possibilities, the 20% exhibitor contribution and the cost of installation may also be financed through DCIP. These additional monies would not be recoupable through VPFs, but would be paid back over time by the exhibitors. Either way, if financed by a bond or if paid up front out-of-pocket, the exhibitors will be responsible for paying back additional costs above the cap. If the average costs per screen to be financed total to $60,000 (including installation), then the $525M would pay for 60% of the combined DCIP screen count.
An announcement from DCIP that funding is in place would be a boon for manufacturers, but would not necessarily cause an immediate boost in the general rollout of digital cinema. To bankers, the risk of funding other digital cinema deployments will not lessen significantly until DCIP has some mileage in its deal and demonstrates that it is on track with recouping equipment costs and interest while meeting overhead. DCIP is uniquely positioned for such confidence building, as all of its revenues and expenses are directly associated with the rollout. But it could take another year to achieve this milestone.
What would a rollout plan look like? In phase 1, Regal is planning to fully digitize its complexes in the Los Angeles and New York markets. The remaining funds will go towards 3-D screens elsewhere in the country. This suggests that the deployment agreements allow DCIP to install less than 50% of screens in a complex in order to collect a VPF. (This exception is probably limited to 3-D screens only.)
How quickly will they be able to install? If installing at a 300 screen per month rate, the three circuits would complete in 4 years. More likely, with to-be-expected ramp time, down time, and equipment supply issues, it could take 5 years to complete.