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Can the Rec Room Drive Cineplex Inc. to Larger Profits?

No matter what anyone says, the movie business is killing it right now. Wonder Woman has been an inspiration to little girls; Star Wars is as exciting as the first time I saw it as a kid; and Vin Diesel and the Rock still blow up more cars than anyone else in The Fast and the Furious. 

If we just look at the numbers, Cineplex Inc.  (TSX:CGX) is doing rather well.

Box office revenue was $734 million in 2016, continuing an upward trajectory since 2011. Its box office per-patron revenue was $9.84, which is up from $9.48 in 2015. Its premium services, such as UltraAVX and iMax, are accounting for a much larger percentage of the revenue, which comes with higher margins.

On the concession side, business is also booming. On average, Cineplex is bringing in $5.65 per patron at the food counter with total revenue in 2016 at $421.2 million. Movie theatre popcorn may not be the best thing in the world, but people are eating it.

However, while we’re in a glory period for movies that have massive market-wide appeal, I believe that the company’s slight pivot towards becoming a general entertainment company is absolutely imperative. Right now, Cineplex depends on Hollywood to churn out great movies; what happens if Hollywood falters?

Back in September, Cineplex bought Tricorp Amusements Inc., which generated $28 million in revenue and adjusted EBITDA of about $6 million. This company distributes arcade games across the Canada and the United States. Although it’s a nice addition, it isn’t enough.

The Rec Room offers large multipurpose entertainment centres that bring video arcades, restaurants, and bars in one giant 60,000-square-foot venue. Unlike the movie theatre, which needs a constant churn of content, the Rec Room just needs to have people that want to play.

In Q1, there were only two Rec Rooms, but they brought in $2.1 million in food and $2 million amusement revenues. Three additional Rec Rooms will launch in 2017 with a goal of having 10-15 total Rec Rooms across Canada.

But could Cineplex try to boost its revenue from Rec Room-like projects? Fellow Fool contributor Will Ashworth suggested that Cineplex could try to purchase Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY), which is very similar to the Rec Room. All told, Dave & Buster’s has 94 locations in the United States and two in Canada. In 2016, it did over US$1 billion in revenue and US$239 million in EBITDA.

Obviously, this speculation is just financial pundits playing armchair acquirer, right?

Not exactly…

In 2014, before Dave & Buster’s had gone public, Cineplex and Onex, a private equity firm, were trying to acquire Dave & Buster’s, offering more than US$1 billion for it. That deal inevitably fell through, but that doesn’t mean that it can’t ever resurface. It would be an incredibly expensive takeover, since Dave & Buster’s has a US$2.8 billion market cap, but this is the kind of deal that would allow Cineplex to significantly pivot.

Cineplex is in a tough business. The movie business can bring great riches, but it can also bring terrible sorrow. I believe that the next phase of Cineplex growth will come from its Rec Rooms. And who knows? Maybe in the future, it’ll get a massive boost with a solid takeover attempt.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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