A new banking agreement finalized Feb. 7 has brought Cineplex Odeon back from the brink of bankruptcy.
“We no longer have to spend our days with our lawyers, bankers and investment bankers working on restructuring the loan,” says Cineplex president and CEO Allen Karp. “We can now put all our efforts into running our business.”
The new agreement releases Cineplex, which operates 1,125 screens in the U.S. and 575 screens in Canada, from an earlier pledge to sell assets, defers principal payments until July 1992 and relaxes restrictive financial covenants which have constrained the company over the past year.
Now the question is: How will a company that epitomized the overexpansion of the ’80s – and led the way in raising the price of movie admissions – fare as a pared-down theater operator in an increasingly difficult environment?
“Cineplex has generally been a price leader and raised prices in New York and a number of other markets to the top limit,” says Stuart N. Brotman, president of Brotman Communications, a Boston-based management consulting firm. “In these times, it’s going to be difficult if not impossible to do that; that won’t necessarily represent any salvation for them.”
Ousted Cineplex founder Garth Drabinsky’s aggressive expansion over the past decade shook up the exhibition business and established the company as a major competitor. But it also left the company saddled with more than $665 million of debt, a host of costly ancillary businesses and declared losses of $78.6 million in 1989.
Karp, who took the reins in December 1989, moved quickly to alter that situation by selling theaters and jettisoning all of the company’s non-core assets.
Under the company’s previous loan agreement, announced last March, Cineplex was required to raise $200 million in 1989 via the sale of assets. But the company fell short of that goal, raising only $120 million by September when the rapidly constricting financial markets and a glut of theaters on the auction block made further theater sales impossible.
The company’s two biggest holders – MCA, which owns 49% of Cineplex and holds only a one-third voting stake in the company, and the Claridge Group, the Bronfman family’s holding company – agreed to kick in $100 million of new financing.
Despite Cineplex’ inability to reach the bank’s goals, lenders were impressed enough by Karp’s effort – he cut management overhead from $55 million to under $20 million a year, sold the company’s stake in Film House Group Inc. to Rank Organisation PLC for $73.5 million and jettisoned its British theater chain – to renegotiate the loan.
While the new agreement will definitely give Cineplex more room to recover, the company will have to forge that recovery in the face of extremely tough times right now in the exhib business.
As film production budgets have skyrocketed, so have the prices distributors charge exhibitors to show their product. Theater chains now pay an average of 55% of their boxoffice receipts to distributors for films. That’s up from 52% in 1989 and 48% in 1987.
“The theater owners margins have been chopped anywhere from 2% to 7%, says entertainment analyst Lisbeth Barron, S.G. Warburg & Co. “That’s pretty significant, especially if you’ve got a heavy debt load.”
While movie admissions remain relatively constant, the number of films produced has shrunk and the number of screens has ballooned; exhibitors are increasingly less able to make up the difference by raising admission.
“Given the current economic downturn, it’s going to be difficult for them to generate additional revenues by increasing prices,” says Brotman.
Other questions confront Cineplex. Key among them is whether MCA and new parent company Matsushita will continue to support the theater chain.
Industry insiders speculate that Matsushita is interested in using the theaters as a testing ground and possible home for its emerging hardware technologies, including high definition television and giant video screens. Matsushita may also want to keep pace with rival Sony Corp., which owns the Loews theater chain.
While Karp says he welcomes any creative ideas that may come from Matsushita/MCA, he says it is important to keep in mind that Cineplex is not a subsidiary of the company and that Matsushita/MCA never tries to treat it that way.
“I’m not sure that the business relationship will give rise to any of those developments directly,” Karp says. “If anything, it becomes a question of our own business plan as to the manner in which we can better use our facilities.”
Industry watchers say MCA’s (and Claridge’s) agreement to provide an additional $35 million line of credit to the company, on top of the $100 million financing infusion, would suggest Matsushita’s support for the longrun.
But Wall Street also is concerned about Cineplex’ commitment under the new agreement to convert into equity by May 31 the $100 million of subordinated debt provided by MCA and Claridge. Analysts fear that a rights offering on the part of Cineplex could dilute earnings as much as 40%. (Cineplex would not discuss the issue, but said it is examining a number of options.)
While the company says it is not currently contemplating selling more of its theaters, some analysts like Warburg’s Barron believe it will be forced to do so. “Right now they are throwing off enough cash flow to meet some of their expenses, like interest and capital expenditures, but not all of them,” she says. “They are probably running about $40 million negative a year.”
Karp would not comment on the company’s current financial position; 1990 results have yet to be released. But he reiterated that no sales are currently in the works. And he pointed to other possible strategies to raise revenues, including promotions and multilevel price tiering at its theaters.
It seems that Karp has convinced more than just his bankers that things are finally headed in the right direction. Even critics like Barron say they now believe a turnaround is in the works. “It’s going to be a very slow process, but it looks like they are finally getting there. They’ve got the right people doing the right things to make it work.”