Partners bet $1 bil on plex appeal

Wall Street firm Donaldson Lufkin Jenrette is teaming up with shopping mall developer Simon DeBartolo Group Inc. to invest up to $1 billion in “entertainment-oriented real estate properties” such as megaplex theaters, the companies said Tuesday.

The joint venture has already begun talks with “several leading theater chains that are interested in contributing entertainment assets to the partnership,” said Barry Sholem, co-chairman of DLJ Real Estate Capital Partners.

“We intend to acquire and develop megaplex movie theaters,” he added, to be leased back to exhibs.

He declined to elaborate, but one of the exhibs believed to be in talks with DLJ and DeBartolo is fast-growing Regal Cinemas. A deal with DLJ-DeBartolo would enable an exhib like Regal to expand its circuit without using its own capital because the joint venture would likely pay construction costs for new theaters and lease them back to the exhib. Regal execs could not be reached for comment Tuesday.

The joint venture is the latest sign of Wall Street’s growing interest in exhibition. In recent months, several leveraged buyout firms have bought exhib companies such as Act III Theaters, while AMC Entertainment is currently marketing to investors a $275 million real estate trust designed to buy most of AMC’s megaplexes in a giant sale-and-leaseback.

Sale-and-leaseback deals are commonly used by exhibs such as United Artists Theater Circuit to finance their growth, of course. And its nothing new for a shopping mall developer to put money into theater development, but exhibition industry execs said Tuesday the participation of a Wall Street firm in the venture was unusual.

“Certainly money is cheap and readily available,” said one exhib exec.

People close to the venture say they recognize the changes occurring in exhibition as circuits build bigger theaters with new features like stadium seating and extra attractions.

“Exhibs need to create new products. They’re looking for capital for growth and we made the judgment that could be a huge opportunity for our capital,” one source said.

DLJ and DeBartolo will likely put at least $125 million each into the venture, with most of the $1 billion to be invested coming from borrowings. People close to the deal say the size of the venture will grow over time as new properties are added.

Sholem said the venture was already “negotiating with a number of regional developers in the U.S., Europe and Asia regarding their contributions of entertainment projects to this partnership.”

DLJ and DeBartolo’s joint venture is not limiting itself to theaters. Sholem said the venture plans to develop a broad range of entertainment properties, including the “location-based entertainment” venues growing up as part of shopping malls and theaters as well as sports complexes and gambling venues.

DLJ and DeBartolo also want to talk with studios like Universal and DreamWorks, sources say, about participating in their property development plans. Universal plans to create a destination resort on its Universal City property while DreamWorks is negotiating to build a 22-acre permanent studio at the Playa Vista property development.

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