You can't spell IMAX without M&A
The maker of gigantic movie screens is searching for a buyer. Should Time Warner or Sony make a big bet on big screens?
NEW YORK (CNNMoney.com) – How's this for irony?
IMAX is known for its monstrously large movie screens but the company is a relative small fry on the Hollywood scene. But IMAX hopes that soon will change.
The Canadian-based firm announced earlier this month that it had hired investment bankers to "explore strategic alternatives." That's Wall Street-ese for "We're up for sale."
With the movie industry mired in a slump, many analysts think that the only way studios can get more sedentary cinephiles to leave the comfort of their couch, where they can watch DVDs on increasingly snazzy flat-screen TVs with elaborate surround sound stereo systems, is to offer a truly wowing experience.
A movie on an 80-foot tall IMAX screen qualifies as such an experience. So it's no wonder that IMAX's sales are expected to increase by 15 percent this year and another 14 percent in 2007. Profits, meanwhile, are projected to rise at a more than 30 percent clip this year and next. (For more about how IMAX has bucked the downward trend in Hollywood, click here.)
Still, it's difficult to handicap who just might be the leading contender to buy IMAX.
Michael Kelman, an analyst with Susquehanna Financial Group, points out that IMAX could be an interesting acquisition for a media firm that owns a movie studio, technology companies that would want to inherit IMAX's patents, other movie theater chain companies or even a private equity firm.
Big screen dreams for Time Warner and Sony?
But looking at the vast list of potential buyers, two stick out.
Time Warner, which is also the parent company of CNNMoney.com, could make sense since the firm's Warner Brothers movie studio has been IMAX's most significant Hollywood partner.
"People have speculated that Time Warner is one of the more interested companies looking at IMAX since a lot of their movies have gone through the IMAX pipeline," said Kelman.
Last year, Time Warner released high profile films "Batman Begins," "Charlie and the Chocolate Factory," and "Harry Potter and the Goblet of Fire" simultaneously for IMAX screens and standard movie theaters.
And Time Warner (Research) is being just as aggressive this year. The company released "V for Vendetta" in IMAX format last week. IMAX said that the movie grossed about $1.36 million on 56 screens. Later this year, Time Warner will also release "Superman," "Poseidon," and animated movies "Ant Bully" and "Happy Feet" in IMAX theaters. The latter two films will be in 3D as well.
Sony, which is releasing one of its movies, the cartoon "Open Season," in a 3D IMAX format later this year, could also make sense as a buyer of IMAX, Kelman said.
In addition to owning a movie studio, Sony (Research) is also a major manufacturer of consumer electronics. So IMAX could be attractive to Sony from an intellectual property standpoint as the company could possibly use some of IMAX's technology in its television business.
IMAX's market value is currently about $413 million. So that would qualify as a relatively small deal for Time Warner or Sony, or for that matter a company like publicly traded Regal Entertainment (Research), the nation's largest movie theater operator with more than 6400 screens.
Of course, a buyer would probably have to pony up more for IMAX though. In a recent research note, Piper Jaffray analyst Anthony Gikas said that IMAX could be worth between $11 and $12 in a takeover scenario.
However, that's not a big premium to the stock's current price. IMAX shares now trade at around $10.40. The stock has shot up about 10 percent since IMAX said it was for sale.
Gikas thinks IMAX already has a potential deal on the table. It's worth noting that when IMAX announced it had hired bankers the company added that it was doing so because it already had received "several unsolicited inquiries."
"We think the company has one bid they are willing to accept, given the unusual (and risky) public nature of the announcement," wrote Gikas in his note. So the company could be trying to drive up the price.
But Eric Wold, an analyst with Merriman Curhan Ford, said that IMAX may be able to attract a significantly higher price in a takeover. He argues that the company could be worth between $700 million and $800 million, which would be a stock price in the high teens.
Wold said he thinks that Time Warner is the most logical candidate among the major movie studios but he adds that other media firms have also begun to realize the potential in IMAX as well and would likely be willing to bid for IMAX in order to keep it out of a rival's hands.
"Other studios may want IMAX. If one makes an offer, others have to ask why and take a look," Wold said.
Whether or not IMAX is successful in trying to get multiple parties bidding for it remains to be seen. But Kelman is fairly confident that IMAX's days as an independent company are probably numbered.
"I'm not sure if there will be a bidding war," Kelman said. "But I think a deal is likely to happen. I don't think the company would have made it public had they not thought that they already had some offers in place."
Get ready for the Hollywood cartoon wars. Click here.
IMAX is bringing in big box office. Click here.
Merriman's Wold owns shares of IMAX. Other analysts quoted in this story do not own shares of the companies mentioned. Piper Jaffray has performed investment banking for IMAX..