SOON IT WILL BE THAT TIME on Wall Street when everyone is merry, spirits are bright and little children’s faces shine with anticipation. I refer, of course, to bonus time. The normal year-end tidal of cash that washes over the financial district is taking on tsunami-like proportions.
There is one group of financial geniuses who may find only lumps of coal in their stockings, however. They are those guys and gals who work high up the Wall Street totem pole at some of the top leveraged buyout shops who decided several years ago that the exhibition chains looked ripe for acquisition.
Such luminaries as Kohlberg, Kravis & Roberts, Warburg Pincus, the LBO arm of Merrill Lynch and Hicks, Muse rushed out in the mid-’90s to buy cinema chains, having perceived that those companies that built ultra-modern megaplexes with reclining, stadium-style seats would become destinations for the growing hordes of suburban moviegoers.
And build they did. The six largest exhibitors have spent $2.8 billion since 1996, most of it borrowed, to construct the veritable palaces in which today’s moviegoers can sip a Frappuccino, choose one of two dozen pics, slide into a reclining seat and place their half-gallon of Diet Coke in a convenient drink holder.
Two of these Big Six of exhibition — Regal and UATC — were taken private in leveraged buyout transactions several years ago, after each of them had been on acquisition and building binges of their own.
The shareholders of the four that have remained public — AMC, Carmike, GC Cos. and Loews Cineplex — certainly wish the Wall Street dealmeisters had knocked on their doors back then.
The stock prices of these four are down an average of 50% this year, despite the roaring bull market, with three of them now selling for approximately one-quarter of their all-time highs. Last week’s announcement by Carmike that it would report a sizable loss for the usually strong fourth quarter caused one of its last fans among the analytic fraternity — Jeff Logsdon of Seidler Cos. — to “throw in the towel” and recommend that his clients dump Carmike despite its anemic price.
Back in 1995, when the exhibitors were the toast of Wall Street, there was a near-universal belief that box office grosses would grow rapidly and that theater admissions would finally break out of the 1 billion-1.2 billion straitjacket in which they had remained confined for nearly 20 years.
That was right. Since 1995, grosses have risen from $5.3 billion to $6.9 billion last year, with 1999 on track to reach $7.5 billion. Admissions, long Wall Street’s whipping boy for exhibs’ failure to grow, have climbed steadily from the 1.2 billion ’95 level, with more than 1.6 billion people likely to go through the turnstiles in 1999.
SO WHAT WENT WRONG? One clear answer is overbuilding. The number of domestic screens, which in the first half of the ’90s slowly grew from roughly 24,000 to 28,000, has exploded over the last four years to nearly 37,000.
More insidious than the absolute rise in the number of screens has been the cost of these cinema paradisos. Someone recently discovered that stadium seating — definitely a hit with the audience — requires more cubic feet of space per patron, with obvious attendant effects on building costs.
Adding all kinds of luxurious amenities to attract the customers worked, but further raised the cost per screen, at the same time rendering those old multiplexes — the latest word in exhibition only a dozen years ago — unattractive by comparison.
However, one man’s meat is another man’s poisson. These megaplex Taj Mahals are themselves part of the reason grosses are rising at their current rate.
The old industry truism about giving the people what they want clearly applies to theaters as well as the movies. Those lucky souls who make the movies to fill these theaters should thank Wall Street for backing the exhibitors’ play with billions of bucks. With more screens to fill, many of the smaller pics can now play the most desirable locations.
But something more subtle, and very positive, is also happening. The multiple starting times for each weekend’s big releases at major locations have created a phenomenon not seen to any large degree since the ’50s: People once again are going to “the movies,” reasonably certain that one of several movies at the multiplex will start within a reasonable time of their arrival.
For the past several decades, nearly everyone past dating age had waited to hear positive word-of-mouth, usually from several sources, about a particular film before setting out for a cinema.
Distributors and producers alike are the beneficiaries of the capital markets’ willingness to fund Regal’s, Carmike’s and AMC’s spending sprees, to name the most notorious.
Will the building boom continue? Almost certainly not, if for no other reason than because the Wall Street financiers will want to see some light at the end of the exhibition tunnel before coughing up more dough.
BOTH UATC AND GC are currently losing money from their theater operations before interest and depreciation charges, although GC’s strong balance sheet and conservative building program makes its worries definitely manageable.
(However, the red ink at UATC, owned by Merrill Lynch, is such that its balance sheet shows a retained earnings deficit of $552 million, making its survival uncertain.)
Meanwhile, Regal, Carmike and AMC are among the barely walking wounded. In just the first six or nine months of ’99 — the periods vary from company to company — these three continued to spend at a ferocious rate, with more than $650 million in capital expenditures among them so far this year.
By comparison, their collective operating cash flow for the same period is barely a quarter of that amount.
Is there a bright spot on the horizon for any of the theater chains?
For his thoughts on this question, I turned to David Forbes, distribution topper at both MGM and Orion during the relatively brighter years, and now a consultant.
Amid the industry’s current chaos, he picked Loews Cineplex as the one exhibitor that didn’t deserve to be tarred with the free-spending brush. Indeed, nearly all of Loews’ capital spending in the past three years has been internally generated from operations.
Forbes pointed out that the Loews side of the business is in fairly good shape, and that unwise acquisitions by the prior management at Cineplex were in the process of being sold, closed or fixed.
As for the others that are still publicly owned, their stocks will likely remain depressed until continued growth in ticket sales is matched by sharply curtailed new builds.
And what will the LBOers at KKR and Hicks, Muse do? They could sell, but in the punch line of Wall Street’s oldest joke — to whom?
Personally, I wouldn’t be surprised if, for one or more of the players, the next chapter in this drama is numbered 11.
(Roger Smith was formerly VP, corporate affairs, of Warner Communications and exec VP of Carolco Pictures. He now heads the Gotham-based consulting firm of Roger Smith & Co.)