In June, I addressed GDC’s filing of its intent to openly sell shares on the US NASDAQ exchange. Late June, GDC withdrew its filing, which had been amended to raise up to $92M, citing poor market conditions. There are a implications in this, which are discussed below.
GDC cited four areas for sales: conversions, new construction, replacements, and private venues. A little research would show that none of these areas will provide strong demand for GDC’s product. In the conversion market, approximately 20,000 screens remain to be converted, and Doremi will likely score 50% of that. This sales opportunity will dry up within a year, and it wouldn’t take long for a savvy investor to figure it out. The IPO cites a 25% increase in screen growth in China in 2011. In pointing to the stunning growth in Chinese cinemas, it turns the bet on GDC into a bet on the Chinese economy, which is not as strong today. The IPO stated: “Upgrades in digital cinema equipment are expected to be driven by advances in digital cinema technology, the introduction of new DCI specifications and enhanced content formats, such as 3D and high frame rate playback.” This statement went farther than I am comfortable with, implicating that DCI would be the cause of an early replacement cycle in the marketplace. No distribution executive worth his or her salary would allow that error to be made. VPF agreements stipulate that “who pays” for changes imposed by DCI would become a matter of negotiation between distributor and exhibitor. Even without such clauses, the outcome is easy to predict: if a studio wants its movie to be played on upgraded equipment that has little or no possibility of increasing revenues, then the studio pays. Lastly, the private venue market that GDC points to isn’t worth considering here. The story in this is that the institutional investors required to get onboard to make this IPO float simply knew better and weren’t interested.
What’s next? It’s unlikely that GDC’s story will get better, and it’s exit from the IPO likely signals the beginning and end of GDC’s attempt to raise money in the public market.
Looking a little further, Carlyle either wants out, or GDC needs cash, or a combination of both. Carlyle Asia Growth Partners owns approximately 45% of the company, and is the largest shareholder. Growth in the cinema market not being an option, GDC is either seeking cash to sustain itself, or Carlyle is seeking to cash out. Whichever, it’s unlikely that Carlyle is interested in putting more money into the company, and that could put a damper on potential investment from others.
All of this has implications for GDC’s business model, which is to dramatically undercut its competitors in price. Exhibitors may like this (for awhile, at least), but ultimately, GDC is leaving money on the table. For a company that is seeking capital, either to appease its investors or to sustain operations, it would seem that leaving money on the table with exhibitors isn’t the smartest of moves. This could change.
