Distributors reacted with a mixture of concern and skepticism Wednesday to news that Sony Theatres and Cineplex Odeon were in talks to merge, creating a theater chain that would heavily dominate the New York and Chicago markets.

Wall Street sources confirmed a published report that the two companies were discussing a deal, but sources downplayed suggestions that Sony would buy Cineplex, which would cost close to $700 million, with its $317 million debt included. Cineplex stock closed unchanged Wednesday at $1.75.

Wall Streeters say Sony would be unlikely to pay out such a large sum for the circuit. While Cineplex has a number of high-grossing complexes in and around New York City, many of its theaters are aging.

A more likely scenario is that Sony would spin off its theater group into Cineplex in exchange for stock. Such a deal would likely give Sony control over the combined entity, since Sony’s theaters would probably command a higher value than Cineplex’s struggling circuit.

Wall Street sources said in the past Sony has turned down offers to buy its theaters, but the company has told outsiders it would be interested in a partnership with another theater operator if it had control.

Time for consolidation

News of the talks comes less than a week after the announcement of a planned merger between Regal Cinemas and Cobb Theatres (Daily Variety, June 12). Some see the dealmaking as a sign of a long-expected round of consolidation in the industry.

The Sony-Cineplex talks are apparently an indication that the Bronfman family, which owns a major direct stake in Cineplex and has an indirect shareholding through Seagram Co. Ltd.’s Universal Studios, has lost patience with Cineplex’s efforts to rebuild its circuit.

Universal and the Charles Bronfman Trust put $50 million in new equity into Cineplex early last year as part of a $114 million capital-raising. The money was earmarked for theater renovation and expansion of Cineplex’s circuit.

Cineplex has been showing some signs of improvement, reporting a $2.1 million profit for the March quarter compared with a $7.1 million loss a year earlier, although the better performance largely reflected industry conditions.

Staying in the game

A joint venture would not enable Universal or the Bronfman trust to cash out, but it would give both entities stock in a more valuable company. Cineplex, Sony and Universal all refused comment Wednesday.

Sources say it is not clear who would run the combined company, although Sony’s desire for control makes Sony Theatres’ management team of Barrie and Jim Loeks the most likely top execs. While Sony does not release financial information on its theaters, its circuit is generally in better shape than Cineplex’s group.

The combined group would have close to 2,500 screens at 450 locations, with a dominant presence in and around New York City. Cineplex also recently signed on to build several new sites in New York, mostly in suburban Long Island.

Additionally, a Sony-Cineplex alliance would have a near stranglehold on the prolific Near North Side of Chicago.

However, competition is fierce in the remainder of Chicago, where AMC, General Cinemas, Marcus, Regal and Cinemark all have built, or plan to build, modern complexes.

Antitrust questions

Because of the high-profile markets involved, some industry observers speculated the deal might raise antitrust questions. In the past, mergers in considerably smaller markets have attracted the scrutiny of the Justice Dept.

The deal would also give Sony its first high-visibility presence on the West Coast, most notably Cineplex’s Universal Citywalk 18-plex. So far, Sony’s only Southern California location is its joint venture with Magic Johnson in Baldwin Hills.

Sony is currently building a 15-plex in San Francisco as part of its Metreon entertainment mall in the Buena Vista Gardens area.

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