The most significant announcement for the rollout of digital cinema was also the most anti-climatic. DCIP finally announced the completion of approximately 70% of its financing package. The announcement was hinging on the signing of a purchase agreement with Sony Electronics. Last minute haggling? Given that Sony will collect the lion share of the money raised by Kasima LLC, the funding entity behind DCIP, no doubt its feet were being held to the fire. (One can only imagine the conversation: “we’re leasing for 12 years, and your replacement guarantee is only for…say what?”)
The Kasima deal was outlined in the February report, but more details are now available. Kasima raised $445M in debt by JP Morgan through syndication of debt rated Baa2 by Moodys. (Just a cut above junk rating.) The $445M is comprised of $335M senior credit facility, and $110M senior revolver loan. In addition, $215M was raised as equity, of which $80M is supplied by the exhibitor-owners, and the remaining $135M junior capital raised by Blackstone. March 10 being SS-day (for Sony Signed), Regal immediately filed an 8K report stating its capital contribution to DCIP of $40,768,500, of which $12,688,565 was in existing projection systems. Cinemark similarly reported a cash contribution to DCIP of $1.2M and a contribution of $16.4m in existing equipment, totaling $17.6M. That would leave around $21.6M contributed by AMC.
If you’re an exhibitor, you’re no doubt wondering about the 20% exhibitor contribution. After all, $80M out of $660M is only 12%. Cinemark reports that the digital projection systems will be leased from Kasima under a twelve-year lease. Under the equipment lease agreement, Cinemark will pay a minimum annual rent of $1000 per digital projection system for the first 6.5 years, increasing to an annual $3000 per digital projection system thereafter. If one does the math, assuming 10,000 screens of identically priced equipment purchased for $660M, the $6.5K paid over 6.5 years just about makes up the missing 8%. (Rent would be considered revenue by DCIP, and would be applied to the exhibitor contribution.) It would seem, then, that the exhibitors plan to buy out their leases at the 6.5 year milestone.
A Surprise Announcement Coming?
Sooner or later, another deployment entity is going to enter the game in the US. The reason is that the TI ecosystem is hungry. The TI ecosystem offers the exhibitor a Chinese menu of components to choose from. The companies whose names are on the Chinese menu not only compete with each other, but collectively they compete with Sony. In contrast, the Sony ecosystem is very different. When one buys a Sony projector, all components are supplied by Sony, and installed by Sony. The company is a one-stop-shop.
When Regal chose to dump the Chinese menu in favor of the one-stop-shop, a lot of manufacturers were left with very little opportunity to sell their product. In the US, the only current opportunity to score VPF-financed sales for a manufacturer within the TI ecosystem is with Cinedigm. Sadly for them, Cinedigm has a poor record of closing deals. Its nickel-and-dime approach to digital cinema, where lots of nickels and dimes are charged to the exhibitor for this and that, hasn’t proven to be popular. One major exhibitor, after operating a Cinedigm-converted complex, swears it’ll be the last.
For manufacturers, this is a dilemma. It would not be surprising, then, if a manufacturer should rise to the occasion with VPF financing of its own. This would not be the first time. Dolby has its own VPF agreements, but decided last year to pull out of the equipment financing game. Kodak, just when about to close on its VPF agreements, decided to take down its digital cinema shingle. The one manufacturer left holding VPF agreements is GDC, of whose present agreements target the Asian region. But to amend a VPF agreement to include the US is a much smaller and faster task than to start afresh. And so it is GDC that is rumored to be in talks to expand financing operations to the US.
This may not be the kind of news that Doremi and Dolby want to hear, but it could be quite exciting for TI’s licensees, which are Barco, Christie, and NEC. It brings to the forefront all of those GDC announcements made during ShoWest. No doubt Doremi shipped an impressive number of units in February, but in a twist of fate that could be ominous, it is GDC whose name has been appearing on all of the major deals, including those with Cinedigm.
At the Business of Entertainment lecture series held at Woodbury University this month, a prominent business attorney predicted that a Chinese company would buy a major US studio within 3 years. It’s hard to argue against the point, given that the buying spree of US companies by China began a few years ago. Just this month, a Chinese company bought Volvo. Who knows, in a few months a Chinese company could be offering VPF financing, along with its server, to US cinema owners.