NEW YORK — Hicks Muse Tate & Furst Inc. agreed Wednesday to pay $850 million to buy No. 2 exhib United Artists Theater Circuit, giving the Dallas leveraged buyout firm the “platform” it wanted to consolidate the industry at its second attempt.
Hicks Muse lost out in the bidding for Act III Theaters last month to LBO giant Kohlberg Kravis Roberts, which agreed to pay $665 million for Norman Lear’s company.
Like KKR, Hicks Muse promises to put more money into the industry both in possible acquisitions and financing UATC’s existing upgrade plans.
Hicks Muse likes exhibition because movie theaters are attractive entertainment compared to other venues, Hicks Muse chief operating officer John Muse said. And the industry’s prospects are supported by Hollywood’s continued increase in film production and marketing spending, he said.
“That, together with the stable cash flow characteristics of the business and the opportunities for potential consolidation, is what attracted us to the industry,” Muse added.
And while many industry execs were surprised by KKR’s deal, Hicks Muse’s payment for UATC surprised even more. “It’s a big price,” said one rival exhib exec.
Of the $850 million, about $550 million goes to refinance UATC’s debt and preferred stock. UATC’s owners — Merrill Lynch investment partnerships — walk away with at least $300 million for the common stock, although not all of that will be paid immediately.
The partnerships are retaining about 10% of the stock, Hicks Muse said, which means they could end up with a higher price if UATC’s value increases in coming years.
Just on the $300 million value, however, the Merrill Lynch partnerships have earned a profit of $188 million on the $112 million they invested in the $680 million buyout of UATC in 1992.
A source close to Merrill Lynch said the partnerships were “very pleased” at the deal, which came after five tough years for the exhib when it lost its No. 1 status to Carmike Cinemas and lost market share to bigger theaters built by rivals like Regal Cinemas and AMC Entertainment. Merrill Lynch’s management firm for UATC, Stonington Partners, declined comment.
UATC’s troubles kept some bidders away, Wall Streeters said. Some of the LBO execs who bid on Act III said UATC wasn’t as attractive because the bigger circuit is spread around the country, with theaters that tend to be older than the average and which need expensive renovation.
The relative state of the two circuits was highlighted by the price — KKR paid an effective $907,000 per screen for Act III’s 733 screens while Hicks Muse is paying just $390,000 per auditorium for UATC’s 2,174 screens.
On an earnings basis, Hicks Muse is paying about 8.5 times UATC’s expected 1997 earnings before interest, taxes, depreciation and amortization (cash flow) of $100 million, whereas KKR paid more than 10 times cash flow for Act III.
But while KKR paid more on these measures to get into exhibition than Hicks Muse, the state of UATC means that Hicks Muse is effectively paying more, Wall Street analysts said. Aside from its better market position, Act III owns the land under many of its theaters, whereas UATC has sold most of its properties and leased them back.
‘A great job’
Muse plays down these issues. He said that UATC chief operating officer Kurt Hall, who took over management of the circuit after Stewart Blair quit last December, has “done a great job” repositioning and streamlining the circuit.
Since January, Hall has sold UATC’s international theaters, reduced its headquarters’ staff to cut overhead, and begun a $175 million two-year plan to renovate and expand UATC’s theaters in key markets while selling off properties in less important ones.
“They have made a lot of progress towards turning (UATC) around. They have a lot of very attractive theater markets,” Muse said, noting UATC’s strong presence in New York and California.
He said while UATC might be vulnerable to overbuilding by rival exhibs in a “few markets,” Hall’s team has “responded vigorously and are now in a very good position” in most markets.
Hall and the rest of UATC’s management team will be staying on under the new owners in the circuit’s Denver headquarters. Hicks Muse will restructure UATC’s balance sheet, refinancing $142 million of expensive preferred stock, extending the maturity on $404 million of debt and adding $125 million in extra credit to make life easier for the management team.
Additionally, Muse said Hicks Muse would have a longer time frame than Merrill Lynch’s investment partnerships. “I think the fact that Merrill Lynch had been trying to get out of the LBO business inhibited to some degree the long-term plans the company could pursue and now we are giving Kurt and his team not only additional capital but more of a long-term investment view.”
Hall said the plans to refocus UATC’s efforts, announced earlier this year, will likely not change as a result of the deal. He said the Hicks Muse acquisition highlights the value of UATC’s locations.
He added that UATC doesn’t need the extra credit because the circuit has lately begun generating more cash than it is using in new investment, which is a turnabout from the past few years.
Like KKR, Hicks Muse will remain on the lookout for other acquisitions although Muse was cautious about future deals.
“We think we are on the cusp of some significant consolidation activity in this industry, but it takes a willing buyer and a willing seller and a reasonable price to make that happen and I am reluctant to make predictions,” Muse said.