After months of closures at cinemas island-wide and multiple delays holding back production of even Hollywood blockbusters, mm2 Asia’s founder and executive chairman Melvin Ang is simply asking shareholders for more time. “It’s been a challenging year, not only for our sector but many others as well. I really urge our shareholders to give us a bit of time. We are working very hard to make things happen,” pleads Ang in an interview with The Edge Singapore.
Ang says an outbreak of a communicable disease has been his “biggest fear” since mm2 Asia moved beyond content production with the acquisition of movie theatres, supposedly to form an integrated industry chain. “When we acquired Cathay Cineplexes, analysts told us we went from an asset-light business to an asset-heavy business … Today, it has happened,” says Ang.
To fund the $215 million purchase consideration, the company took out additional loans from banks and drew down on its revolving credit facilities.
On Feb 3, mm2 Asia announced a one-for-one rights issue to shareholders as it seeks to repay its $50 million 7% fixed rate notes, due on April 27. For each existing mm2 Asia share, shareholders are entitled to subscribe to one new mm2 Asia rights share at 4.7 cents each, a hefty 60.83% discount to its Feb 1 closing price of 12 cents each.
If fully subscribed, the rights issue will raise some $54.65 million in gross proceeds. From the proceeds, $51.75 million will go towards repaying the $50 million 7% fixed rate notes and the accrued interest to a US$300 million multi-currency medium-term note (MTN) programme, established in 2018.
In addition, the company announced on Jan 21 that it had secured an extension for the maturity date for the convertible debt securities of $47.85 million, issued on Feb 7, 2018, until the end of the year.
Following the rights issue announcement, shares in mm2 Asia fell to a historic low of 7.7 cents on Feb 10. Back in October 2016, mm2 Asia shares hit as high as 88 cents, after the market reacted positively to Ang’s plan to build a media and entertainment powerhouse.
See: mm2 Asia to tap shareholders for $52.15 mil with 1-for-1 rights issue
“Some people like the rights issue, some people don’t. But it’s about future growth and we’re taking this seriously. In the interest of our balance sheet, we think it is the best option,” he says.
At present, paring debt is at the top of Ang’s agenda though. “April is not that far away,” he adds. “We’ve always considered the options on how to pay back the MTN. Taking away Covid-19 uncertainty, the rights issue is the most definite, concrete thing that we can do.”
In support of the rights issue, Ang, who holds a 38.11% stake in the company, will subscribe to his entitlement in the rights issue. That means he will nearly double the number of shares he holds to some 886.3 million units. However, he will not be taking up excess rights shares unwanted by other shareholders.
Tackling the Covid-19 challenge
Indeed, Covid-19 has severely impacted the company’s financials. In 1HFY2021 ended September 2020, its cinema business contributed $3.6 million in revenue, a fraction compared to revenue of $87.9 million in FY2020.
This was also a sharp fall from FY2019, when the cinema business generated revenue of some $100.7 million, nearly 40% of the company’s total revenue of $266.2 million.
A year earlier, in FY2018, the cinema business had accounted for $45 million out of $192 million in total revenue.
But Ang maintains that his team is working hard to steer the company in the right direction despite the pandemic. “Countries are slowly opening up; we can do production work in more places now. Our pipeline is strong; we have a slate of content to be released in the next 12 to 18 months. We have projects that are fully funded; we are in quite good shape.”
Ang likens running operations under Covid-19 to a game of musical chairs. Among sporadic lockdowns in China, Singapore, Hong Kong, Malaysia and Taiwan, mm2 Asia will stop production work in one location and shift its focus elsewhere. “Thankfully, our projects are quite spread out. So, it didn’t affect our pipeline. In fact, our teams are taking this time to fine-tune their projects in the pipeline,” says Ang.
He is also encouraged by how quickly Chinese audiences have returned to cinemas. “I’m happy to see that in China, which has the Covid-19 situation under control, people are going back to cinemas. I would worry if you have good movies and no one is going back, because it proves that the entire position of cinemas has changed.”
Spin-off, merger among top priorities
As the cinema business is “probably the worst-hit business segment” in mm2 Asia’s stable, Ang also plans to spin it off as an independent business. In December it announced plans for a spinoff of its cinema business for its own listing on the Catalist board of the Singapore Exchange are in the works. “The IPO of the cinema business is clearly to help our balance sheet. It’s definitely one of our top priorities,” says Ang.
Operated via its wholly-owned subsidiary, mm Connect, the company’s cinema business operates 119 screens in 14 locations in Malaysia and 64 screens in 8 locations in Singapore under the Cathay Cineplexes brand.
In a press release, mm2 Asia said the proposed spin-off will allow its cinema business to be financially independent and raise the funds required for its new growth opportunities, without relying on the parent company for financing or financial support.
In addition, the company believes group debt will more than halve following the rights issue and cinema IPO. Following both corporate actions, mm2 Asia expects total net borrowings will shrink from $253.3 million as at Sept 30, 2020, to a projected $116.4 million. Correspondingly, net gearing is projected to fall from 1.0 times to 0.4 times.
And that wasn’t all. A week after announcing plans for the separate listing, mm2 Asia announced it was in talks to merge its cinema business with competitor Golden Village. The potential merger partner is the Hong Kong-listed Orange Sky Golden Harvest Entertainment (Holdings) (OSGH), which runs 14 cinemas under the Golden Village brand in Singapore.
Known from 1970 to 2009 as Golden Harvest, the Hong Kong film production company operates a total of 35 cinemas with 285 screens in Hong Kong, Taiwan and Singapore.
In October 2017, Golden Harvest acquired the other 50% stake of Golden Harvest from its joint venture partner, Australia’s Village Roadshow, granting the company full ownership of Golden Village. This came after a failed bid in June 2017 by mm2 Asia to acquire the Village Roadshow stake, as Golden Harvest withheld its blessing.
According to mm2 Asia, talks of the merger are happening “parallel” to the possible listing of the cinema business. “In the event that the IPO is completed successfully, mm2 Asia and OSGH will discuss in good faith the basis on which the merger and the proposed transaction would take place, taking into account the listed spin-off business,” said the company in its announcement.
The company added that both sides are discussing the financial terms based on operating figures from FY2019, subject to mutually agreed adjustments. It has appointed United Overseas Bank and other professionals to advise on the proposed spin-off and listing.
mm2 Asia is no stranger to spin-offs. In 2015, the company acquired Vividthree Productions. The following year, mm2 Asia acquired concert producer and promoter UnUsUaL Group before taking itself public in October that same year.
In April 2017, UnUsUaL was listed on the Catalist board. In September 2018, Vividthree, which specialises in virtual effects and computer-generated imagery (CGI), went public as the first “immersive digital content production” company listed on the SGX.
In fact, one such CGI done by Vividthree for Pavilion Kuala Lumpur shopping mall for the recent Lunar New Year has been making its rounds on social media. It depicts a bull being spray-painted in gold behind a glass enclosure, before the animal charges forward, shattering it.
Interest from private equity and regional expansion
On Feb 7, mm2 Asia announced that it has received a non-binding term sheet from a private equity investor expressing interest in a potential acquisition, involving taking a minority stake in one of its core businesses. Neither the investor nor the exact business area of interest has been identified. When asked, Ang declined to comment further, citing how this latest development is still at a “very preliminary stage”.
“The term sheet, if entered into, would provide the investor with an exclusive period of 90 days to conduct a preliminary due diligence exercise, and for parties to prepare and negotiate the terms of the binding investment agreements,” read the announcement.
Looking ahead, Ang is confident of pent-up demand for film among the region’s markets. Aside from the booming film markets of Hollywood, Bollywood and China, Ang says mm2 Asia is trying to set up shop in South Korea and Thailand. “We have already been working with people there for licensing rights, but we want to start a presence there, to do some real content development.”
Presently, mm2 Asia’s core business in content production and distribution has a strong pipeline of 26 projects valued at $99 million running till the end of FY2022, higher than previous years. According to DBS Group Research analyst Ling Lee Keng, financing has been secured for the bulk of these projects.
“With the increasing demand for more content by various streaming platforms in Asia, the group targets to derive 40% of the content production revenue from streaming channels by FY2022,” adds Ling. In her Feb 19 note, Ling upgraded the company to “hold” from “fully valued” but with a lower target price of 8.9 cents from 13 cents last November.
Whatever the case, Ang is thankful to mm2 Asia’s shareholders for sticking with the company. “I would like to thank the shareholders; they have been very supportive. Although some have already divested their shares in the company, I also want to thank them,” says Ang.
For now, he hopes cinephiles and shareholders alike are as excited as he is about the year ahead. “Give us time. We are on the right track. Wait and you’ll see more."
