Mittleman Brothers Still Not Impressed By AMC’s Carmike (CKEC) Offer, Scores Big With Revlon (REV), IGT

Mittleman Brothers is a New York-based hedge fund, which has a US equity portfolio worth $220 million as of the end of September. The fund managed around $450 million at the end of October including its foreign holdings. Mittleman employs a concentrated, long-term investment approach, typically holding between 10 and 20 positions. The fund is not constrained by the market capitalization of the stocks it invests in, though it prefers small-caps, believing that the greatest discrepancy between fair value and market pricing occurs in small-cap stocks. Mittleman also invests a substantial portion of its funds in international companies. While the fund’s long-term performance has been good, it has underperformed the S&P 500 index over the last 3 years. The Fund’s largest holding as of September 30, Carmike Cinemas (NYSE:CKEC), did perform well during the 3rd quarter of 2016.

In this article, we’ll discuss the Fund’s largest holdings, including Carmike, as well as see what Mittleman thinks about their future prospects.

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Carmike Cinemas, Inc (NASDAQ:CKEC), which owns and operates movie theaters in the U.S, was held by 18 funds tracked by Insider Monkey as of September 30, down by five over the quarter. Carmike Cinemas Inc (NASDAQ:CKEC) rose by 8.5% in the second quarter after AMC Entertainment Holdings Inc. (NYSE:AMC) raised its acquisition offer from $30 to $33. Mittleman is still opposed to the merger despite the increased price however, as it thinks that the minimum value for Carmike should be $40 per share. AMC Entertainment Holdings Inc. (NYSE:AMC) bought another theatre chain called Odeon-UCI in mid-July for which it paid 9x EBITDA. For CKEC, AMC is only paying 5.3x EBITDA, which is why Mittleman believes the offer is a weak one.

An FBR report recently estimated that AMC would be generating $682 million in value for a deal size of $1.2 billion, which is a huge amount of value creation that should be shared more equitably with CKEC shareholders. AMC is currently the 2nd-largest theater chain in the U.S, while CKEC is the 4th-largest. The fund thinks that AMC should pay a substantial premium, as the combined entity will become the top theater chain in the U.S. The fund intends to keep holding Carmike even if the merger is approved, as it believes that AMC’s stock is also worth $40 at fair value, which is much higher than its current price. About 2.2% of AMC Entertainment Holdings Inc. (NYSE:AMC)’s float was held by 16 hedge funds in our system on September 30.

 – Further Reading: Top Grossing Movies of 2015

We’ll check out what the fund had to say about two other stocks on the next page.

Revlon Inc. (NYSE:REV) is one of the world’s largest sellers of beauty and personal care products and recently announced that it would buy Elizabeth Arden (NASDAQ:RDEN) for $870 million to strengthen its skincare and fragrance business. Mittleman thinks that Revlon is undervalued, with a fair value of $78.50, well over twice as much as the current share price of $28.95. Revlon also trades at a much lower EV/EBITDA level than its peers. The fund thinks that while the company’s profits may dip in the short-term due to the merger with Elizabeth Arden, its EBITDA will increase over the long-term as the cost synergies from the merger are realized. Mittleman is bullish on Revlon Inc. (NYSE:REV) partly because of its ravenous growth, with it having grown faster than other cosmetic companies over the last 5 years and gaining market share. However, just 9 hedge funds in our system held shares of Revlon worth $15.66 million as of September 30.

 

International Game Technology (NYSE:IGT) is a global gaming company which specializes in the design, manufacture and marketing of casino-style gaming equipment, technology and game content across multiple platforms. The world’s largest lottery systems management and slot machine company is currently trading near its 52-week high, with a market capitalisation of more than $5.7 billion. It was a big contributor to the fund’s Q3 performance, as investors started realizing the potential of the high-quality company. Mittleman thinks that IGT should trade at no less than 8x EBITDA and 14x FCF, which would imply a fair value of $34.24 per share. The fund thinks that the recession-proof company could trade at 10x EBITDA and 21x FCF in a best case scenario, which would imply a much greater $52 share price. The number of hedge funds in our database with a position in International Game Technology (NYSE:IGT) increased by 7 to 30 during the third quarter, with those 30 funds holding $673.8 million worth of its shares.

Disclosure: None

Correction: an earlier version of this article incorrectly presented the value of the fund’s 13F portfolio as the value of its assets under management.