State of the industry caused financial woes, others may follow

NEW YORK — Things took a nasty turn in the beleaguered movie theater biz Tuesday as Carmike Cinemas, the nation’s fourth-largest exhibitor, filed for Chapter 11 and the biggest chain in the country, Regal Cinemas, hinted that it might not be far behind.

“Things are bad in the sector, but they’re about to get worse,” said analyst Daniel O’Neill of Credit Suisse First Boston. “You can’t keep pouring cap-ex into a no-growth business.” He means the capital expenditure on new theaters that has lifted the nation’s screen count to untenable levels.

Atlanta-based Carmike still has some cash on hand but said senior lenders blocked it from making an interest payment since it violated loan covenants that require it to maintain certain financial ratios. That generally refers to a debt-to-equity ratio, which has been leaning heavily toward the debt side at Carmike and most of its competitors for the past several years.

Distrib execs fully expect Carmike’s existing cash and resources to allow the circuit to soldier on without being acquired, as have other wounded circuits.

Carmike opted for Chapter 11 after careful consideration “of our current circumstances and the state of our industry,” company chairman Michael Patrick said. “Our focus is on preserving our assets and improving our operational strength during this difficult period.”

Making arrangements

United Artists, generally considered to be in the worst shape of the bunch, is hashing out arrangements with its senior lenders. And Regal said it hopes to do the same by the end of the third quarter. AMC Entertainment is hurting as well, as is Cinemark and, to a lesser extent, Loews Cineplex.

The group is staggering under an enormous debt load from building expensive multiplexes across the country, even as attendance in the theaters is flat, and in some cases, down. June was dismal, and competition from the Olympics in September will kill fourth-quarter comparisons as well.

And the new locations are cannibalizing the old ones, which are being closed down much too slowly.

There are about 37,000 screens in the U.S., and most, including the exhibitors themselves, agree that the number needs to fall to 25,000 for the industry to breathe easy again. Exhibs have slowed down their building, but have not stopped it. The screen count was up 9% last year and will be up an estimated 4%-6% this year, as exhibs apparently keep spotting markets that are screaming for a new multiplex.

It’s an example of how “individually rational decisions led to collectively irrational behavior,” O’Neill said.

Worse is good

Wall Street is looking for more cases of Chapter 11. And, paradoxically, the worse things get, the faster they may improve, as financial ills force consolidation and push exhibs to shutter underperforming theaters faster. Mergers in the industry are still a possibility, except none of the players has spare cash for deals, and their stocks and bonds are all way down.

Carmike shares closed at $1.94 Tuesday. They were trading at close to $15 a year ago.

The circuit owes significant amounts to several of the studios that supply it with product. But Carmike’s chief creditors are Bank of New York, trustee for holders of $209.3 million in bonds. Atlanta-based Wachovia Bank is owed $263 million in loans, according to court filings.

(Carl DiOrio, Dade Hayes in Hollywood and Bloomberg News contributed to this report.)

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