Blaming rivals for flooding the market with pricey new movie screens, United Artists Theater Co. posted dismal 1999 results Thursday and disclosed it is talking with lenders about recapitalizing the company.
The recapitalization plan would enable UA to avoid filing for bankruptcy, said CEO Kurt Hall — though ending some theater lease agreements, he conceded, could entail court battles. Analysts and industry observers had pegged a possible bankruptcy filing to the Saturday due date of a $12.5 million interest payment that many believed the company would not be able to make.
In fact, UA said it did try to make the payment, but was blocked Wednesday by the company’s senior secured lenders, a consortium of banks led by Bank of America. The group stepped in because their debt is senior to that of the bond holders and they would rather restructure UA’s senior debt than see lesser debtors repaid under current terms.
Business as usual
Hall described the events as routine for a financially strapped company.
Wall Streeters agreed, citing Englewood, Colo.-based UA’s bumpy ride in recent years.
“Everyone knew it was coming,” said Bishop Cheen, an analyst with First Union Securities. “UA’s always been among the most vulnerable. They had too many old screens and too much debt.”
For the fiscal year ended Dec. 31, UA said its operating losses widened to $53.8 million, from $2.3 million in 1998. Net losses reached $127.3 million, compared with $98 million a year earlier. Revenues fell 5% to $631.4 million, thanks largely to a decline in admissions.
“We are obviously very disappointed with our overall operating results,” Hall said. “While the underlying fundamentals of the business remain sound, our results have been negatively impacted by the race to gain market share by several of our competitors.
“This overspending and aggressive building by our competitors outside of their key market positions has resulted in lower revenue per screen, reduced operating margins, higher financial leverage and very low returns on invested capital for the industry in general.”
Indeed, while other top circuits have added several hundred screens in each of the past two years, most with expensive stadium seating and premium sound systems, UA has held steady at about 2,000 screens. Founded in 1926, it ranks as the No. 6 U.S. circuit.
Although Hall blasted “three or four” rival circuits for creating adverse conditions in the exhib biz, he also acknowledged that UA must become more efficient. In 2000, the company plans to shed a projected 55 theaters, or 371 screens.
Company execs expect other circuits to follow suit, leading to a less debt-laden, more rational environment in which UA can thrive. Stocks of publicly traded exhibs, Hall predicted, would then “be restored to historical levels.”
But analysts warn that slimming down won’t be easy. Individual leases will need to be negotiated before UA can lock the doors.
“They’ve been talking about shedding 400 screens for three years now,” Cheen said. “The first 50 or 100 are easy to shed. After that, you have a fiduciary responsibility to keep theaters open.”
With just a small fraction of UA’s theaters posting regularly strong grosses, the troubled circuit makes an unlikely takeover target. The company, which is controlled by investment fund Merrill Lynch Capital Partners, has been shopped unsuccessfully in recent years.
The most recent overture came in 1997 when leveraged buyout firm Hicks, Muse, Tate & Furst offered to buy UA for $850 million but later backed out of the deal.
Cheen compared the exhib climate to that of retail stores.
“When you have shiny new movie palaces opening up next to older ones, it’s a lot like a hot shopping center 10 years ago that is now someplace where you don’t want to go after dark,” he said.
UA’s stock is privately held but its bonds are publicly traded — lately, at about a nickel on the dollar.
The struggle to repay debt and get UA back on its feet has been frustrating for Hall, who became one of the youngest CEOs in showbiz two years ago at age 38.
“You’re in the river and you’re a really good swimmer,” he said. “But there’s so much spring runoff that you just can’t make it upstream. There’s just too much water coming down.”
(Jill Goldsmith in New York contributed to this report.)