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Easy money tempts exhibs to expand

Fueled by enthusiastic real estate developers and easy money from Wall Street, the exhibition industry is furiously building new screens across the country. But the big question remains: Is the industry heading for a crunch similar to that of a decade ago?

In recent months most of the top 10 exhibitors have upgraded their building plans for the next couple of years. And while some are looking to underdeveloped foreign markets for part of their growth, all see opportunities for adding hundreds of new screens to domestic locations.

Michael Campbell, CEO of Regal Cinemas, predicts that the total screen count in the U.S. will rise by about 15% over the next three or four years – to 30,000 from around 26,000 now. That compares with an annual growth rate of 3.1% for the past four years, according to a recent report by Morgan Stanley. “There is definitely an increase (in building plans),” says Cineplex Odeon VP for marketing Howard Lichtman.

Two weeks ago, No. 1 exhibitor United Artists announced it had arranged a new bank facility partly to finance construction of 150 screens a year for the next three years, double last year’s rate.

No. 2 chain Carmike Cinemas raised $50 million on the stock market late last year and plans to build between 100 and 150 new screens a year for the next several years.

Cineplex Odeon announced May 18 that in the wake of abandonment of its merger plans with Cinemark Inc., it was pressing forward with plans to add 68 new screens this year and an extra 249 screens next year.

AMC Entertainment plans to open 150 extra screens a year over the next five years.

Regal Cinemas announced in March plans to open 210 new screens over the next 18 months.

Sony Theaters says it will bow 300 new screens over the next five years.

General Cinema Theaters, while avoiding an aggressive expansion plan, is replacing some older theaters with newer multiplexes.

Part of the construction plan involves replacing older theaters, primarily single-screen sites or those with only two or three screens, with multiplexes of 10 or more screens, industry execs say. But all admit that the bulk of the building program is to add new screens in areas they claim are underserved because of recent population growth.

Lichtman and several other execs attribute the building surge to greater availability of capital, driven by the rise in box office attendance over the past two years, which has changed sentiment on Wall Street. Bank of America, which arranged UA’s new bank facility in late May, said it was the biggest bank loan ever organized for a theatrical exhibitor.

Wall Street’s new attitude was summed up by a report published May 25 by Morgan Stanley, which said it had “recently turned positive on the industry as a whole, assuming a cyclical upturn in attendance in mid-second quarter 1995 as a result of stronger product after flat box office trends” in the past six months. Morgan Stanley conceded that this year’s total might not exceed the past two years but it expected to see “another positive cycle” in box office begin in 1997-98.

But driving the building surge even more than Wall Street is greater enthusiasm from real estate developers building shopping malls and strip centers, industry execs say.

“Their view of exhibition has changed. We are much more desirable than we were a few short years ago,” says Bill Quigley, United Artists’ senior VP for marketing.

“Entertainment is now a very much sought after part of the new retail developments,” says Sony Theaters chairman Barrie Loeks. “People who own malls feel they need to differentiate themselves, and everybody wants entertainment, so the real estate climate is very favorable.”

The development of “entertainment centers” as part of multiplexes, with attractions like Showscan motion simulator rides, virtual reality and olderers and their replacement with multiplexes with smaller individual theaters had actually reduced the number of seats available industrywide.

Furman Selz analyst John Tinker backed up these claims in a report earlier this year when he estimated that seating capacity dropped from 6.6 million to 6.4 million between 1985 and 1993, while screen count jumped 35% to just under 25,000.

But regardless of whether capacity is growing, the increased investment in the industry to upgrade theaters will require higher returns – which could be jeopardized by a cyclical decline in attendance.

“I don’t think you are going to get a secular increase in theater attendance,” said one banker, who added that the pressure would be on exhibitors to “get more dollars out of those people who are coming.”

Execs argue that multiplexes draw higher attendances than older theaters. Sony’s Barrie Loeks says “in new areas we have seen very significant increases in attendance and the reason that national attendance is not going up is because those increases are offset by deterioration in other places where they’re living off their stock of post-World War II theaters.”

Multiplexes tend to be more efficient, execs say, by increasing economies of scale and allowing exhibitors to show pictures for longer and thereby increasing their share of the box office, since the percentage going to studios declines the longer a picture runs.

But because admission dollars have to be split with studios, exhibitors are focusing on added attractions like virtual reality, or renting out their properties for conferences during the week.

Another factor that could help the industry will be greater efficiencies flowing from consolidation, according to Cowen & Co. analyst Harold Vogel. He says acquisitions by exhibitors like Carmike, which buys up small operators, will continue for the next few years.

Some in the industry expect some bigger deals to emerge eventually. As one banker said, Cineplex’s aborted plans to merge with Cinemark makes Cineplex a candidate for another deal. Another candidate for eventual takeover is United Artists, owned by a Merrill Lynch investment fund, although sources say there are no immediate plans for sale.

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