Shopping mall dinosaurs are facing their Ice Age
- South Africa
- Business rescue, Musica, REIT, Ster-Kinekor
- January 30, 2021
It’s always better on the big screen, unless the person next to you is coughing or there are no new releases to get excited about.
A couple of weeks ago, I found myself at Canal Walk. I made a point of walking past the movies to see what new releases were available that might be worth watching.
As Baby Ghost sat in his pram and pondered about the world, I looked at the list of movies in disbelief. There was absolutely nothing to get excited about. Zilch. Certainly nothing worth risking Covid-19 for (even though we’ve already had it). I felt sorry for couples who aren’t attached to a Baby Ghost. You know, couples who can still go on dates.
I therefore wasn’t surprised to read over the weekend that Ster-Kinekor has gone into business rescue. Importantly, business rescue is not the same as liquidation. In fact, as the name suggests, it is a legal framework designed to save the company.
I wrote in detail about business rescue previously and I recommend you read it to understand the importance of this mechanism in the Companies Act.
The business model for movie theatres is simple: charge you a fairly modest ticket fee before ripping your eyeballs out on popcorn and diluted cooldrink. It worked for years. Along came consumer pressure and Netflix and Covid-19. It reads like a horror movie for theatres, which would still be more enjoyable than the available movies at Canal Walk that day.
The movie theatres are completely dependent on blockbuster releases from film studios. If those studios cut back on filming, or delay releases to avoid a flop, or (even worse) start partnering with Netflix to stream new movies, then the likes of Ster-Kinekor will be relegated to the same vintage dustbin as film cameras and vinyls.
Neither of those products are completely dead, but they are no longer mainstream. In future, you may find one or two movie theatres in each major city, showing a handful of movies that studios still allow theatres to show before Netflix gets stuck in.
A crisis tends to flush out the weak. Ster-Kinekor was strong before the craziness, but Musica was already an endangered species.
Clicks will finally shut down Musica, a decision that is extremely overdue. Trying to sell CDs and DVDs in retail stores makes absolutely no sense. They are so easy to sell online because they are small and easy to deliver, plus there are no size or colour variants. You know exactly what you are ordering.
All 59 Musica stores will close, after trying to reinvent themselves as retailers of specialist electronic products and board games. One almost wonders if there isn’t scope to build a specialist retailer that combines the product lines that actually work within the CNA and Musica formats.
There is only one common loser in the Musica and Ster-Kinekor situations: shopping mall owners. The Real Estate Investment Trust (REIT) model is under immense pressure. It was a watershed decision by Redefine Properties not to pay a dividend due to failure of the solvency and liquidity test, a prerequisite under the Companies Act for paying a dividend.
As a closing comment, AMC Entertainment Holdings, the largest movie theatre company globally, managed to raise $917m in fresh equity and debt capital. The debt structure is interesting, allowing the interest to roll-over until eventual repayment in 2023 (i.e. all the interest is only paid at the end, like the ultimate balloon structure on a BMW you can’t afford). It kicks the can down the road in the hopes that people will flock back to theatres.
In South Africa, Ster-Kinekor needs Business Rescue to survive. In the US, the endless pool of capital means companies can raise new money to survive. Either way, the movie theatre industry is teetering on the brink of collapse.
You can rest assured that Netflix will be there to pick up the pieces, which would go some way towards justifying Netflix’s lofty valuation.
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