Getting in on Lear’s Act

Bidding for exhib chain narrows to financial invetors

NEW YORK — Hoping to establish a platform for consolidation in the exhibition industry, investment firms Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst lead a group of at least five bidders aggressively pursuing Norman Lear’s Act III Theatres, Wall Street sources say.

Expressions of interest for Act III closed Monday and sources say the field of potential bidders is made up almost exclusively of financial investors, including KKR, Hicks Muse and Clayton Dubilier & Rice, all of which manage money for pension funds and other institutional investors.

Other financial investors said to be looking at exhibition and possibly contemplating a bid for Act III include Leon Black’s Apollo Partners and Warburg Pincus, Wall Streeters say.

Exhib consolidation

The financial investors are motivated partly by the opportunity they see for using Act III to consolidate the exhibition industry. With this in mind, several of the firms are believed to be considering a bid for both Act III and United Artists Theatre Circuit, which is also on the market, and putting the companies together.

Spokespeople for the investment firms involved either could not be reached or declined to comment. Neither Act III nor its financial adviser, Donaldson Lufkin Jenrette, would comment.

Interest in Act III has been intense, investment bankers say, and has included expressions of interest from some exhibitors unconnected with financial investors. But these exhibitors were talking of price ranges below those of financial players.

A separate issue ruling out most of the major exhibitors from the Act III bidding is that the company’s 68% shareholder, former TV producer Norman Lear, is believed to want cash and the major exhibs would want to pay with their own stock.

The field of contenders will start due diligence on Act III next week, a process likely to last several weeks before formal bids are submitted.

The intense interest shown so far suggests Act III could fetch close to $700 million, higher than initially thought. That would be the equivalent of about 10 times 1998 cash flow — earnings before interest, taxes, depreciation and amortization — which is a higher multiple than most exhibition companies now trade at on the stock market.

Act III is considered to be well-run and, unlike most other exhibitors, owns the land underneath most of its theaters, which helps it control costs. The company has lately been renovating some of its circuit and is likely to experience an upturn in earnings in the next couple of years.

But the main factor driving the bidding is a move toward consolidation that appears will be spurred as much by financial investors, some of whom already own exhibition companies, as by operators.

At the same time the boom in the stock market has created such huge amounts of cash looking for a home, Wall Streeters say, that money is available primarily to investment firms. Most operating exhibitors, in contrast, don’t have the financial capacity to match the investors.

In recent years Cypress Group has invested in Cinemark, Hellman and Friedman bought a 43% stake in Hoyts Cinemas of Australia, and Merrill Lynch funds have bought control of United Artists Theatre Circuit. While Merrill Lynch is looking to sell out of the industry, both Cypress and Hellman and Friedman are believed to be interested in expanding.

Other financial investors have become more interested in the sector because exhibition companies tend to trade much lower than other sectors of the entertainment industry also experiencing consolidation, such as television and radio.

“Hicks Muse wants to go out and buy Lin Television at 12.5 times cash flow, but if they want to buy movie theaters (they pay) 8-9 times,” said one investment firm exec.

Hicks Muse has paid even higher prices for radio, such as Monday’s $2.1 billion acquisition of SFX Broadcasting, which is equivalent to 15 times cash flow.

The investment firm exec said firms like Hicks Muse also see Act III as the launching pad for consolidation of the industry. Hicks has a strategy of buying a company in an industry and building from that base, a plan it recently said it would follow with Lin Television.

“Act III will be the trigger,” said one investment fund exec.

Interest in consolidation has intensified in recent months in response to signs that some operators are planning to merge.

Sony Corp.’s exhibition group is negotiating a merger with Cineplex Odeon Corp., expected to be announced early next month, for instance, while UATC put itself on the market last week partly because of the growing interest from financial buyers.

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