NEW YORK — Dallas LBO firm Hicks, Muse, Tate & Furst has emerged as the leading candidate to acquire United Artists Theatre Circuit, the No. 2 exhib circuit, at a price that could reach $900 million, Wall Street sources said Friday.
That price is higher than most observers expected UATC to fetch, but it highlights how attractive theater exhibition has become to leveraged buyout players, who see the sector as ripe for consolidation. Just two weeks ago, Kohlberg Kravis Roberts announced its $665 million acquisition of Norman Lear’s Act III Theaters.
Hicks, Muse was the second-highest bidder for Act III. The firm, which has spent big to become a major player in radio and TV broadcasting, is believed to be hunting for a theater circuit that could form the base for a big expansion in the exhibition industry.
Bids were submitted midway through last week, and UATC’s owner, Merrill Lynch investment partnerships, late last week was negotiating with a small group of bidders with the aim of sealing a deal within a week or two, sources said.
Aside from Hicks, Muse, companies thought to have kicked the tires at UATC include KKR — which confirmed its interest last month — Apollo Partners and Warburg Pincus. Neither UATC nor any of the LBO firms would comment Friday.
It’s not clear whether all these firms made formal bids by the deadline. Certainly the pool of buyers for UATC was much smaller than the number looking at Act III. People close to the Act III deal say about 20 companies, including at least 12 LBO firms, put in expressions of interest for Lear’s exhib, the 10th-biggest circuit with 733 screens located mainly in the Pacific Northwest and Texas.
It’s not known how many expressions of interest Merrill Lynch received for UATC, but several of the LBO firms that looked at Act III are believed to have been less interested in the bigger circuit. One LBO exec said UATC wasn’t as attractive as Act III because UATC’s properties were scattered around the country. In addition, the circuit has undergone management turmoil over the past couple of years and lost market share.
And UATC needs to spend a considerable amount of money to modernize its theaters. Its existing plans call for the company to invest $175 million in the next two years expanding and modernizing its circuit.
On the other hand, UATC’s geographic reach is a big advantage for some. With 2,289 screens spread around the country, “it has a much bigger footprint than Act III and it has a national scale,” said one investment banker. UATC has the strongest presence in major metropolitan markets in California, New York, Pennsylvania and Florida.
KKR has made no secret of its plan to expand in the industry. KKR said when it bought Act III it planned to become a “major factor” in exhibition by buying more companies.
KKR view unclear
Whether KKR is as keen on UATC as Hicks, Muse is unclear, however. KKR partner Cliff Robbins noted that one of Act III’s attractions was that its theaters were concentrated in markets that are not overscreened. He noted that overscreened markets like New York, where UATC is strong, are not as attractive.
Observers are divided about the intensity of Apollo’s interest. Some industry execs expected Apollo to strongly pursue UATC because the firm, together with Wall Street firm Lehman Bros., bought $122 million worth of preferred stock in the circuit earlier this year.
The stock has no voting rights, however, and Wall Streeters say the deal may have been more a bet on the price that UATC ultimately fetches than an indication of Apollo’s plan to actually buy the circuit. The preferred stock would likely be redeemed as part of a sale, ensuring Apollo and Lehman earn a big profit on what they paid to buy it.
Apollo’s partner in the Act III bidding, Freeman Spogli, is not believed to be looking at UATC. Some on Wall Street say Apollo did not end up making a bid either.
Given the reduced amount of interest, a price of $900 million is surprising, as it represents more than 11 times UATC’s earnings before interest, taxes, depreciation and amortization (cash flow). Most theater exhibs trade on Wall Street at 7 to 8 times cash flow, and Act III was sold for just over 10 times 1997 cash flow.