Cinema chain nears chapter 11

Regal Cinemas is close to filing for bankruptcy reorg in a move expected to hand control of the nation’s biggest movie theater chain to an investment group led by entertainment entrepreneur and Regal debt holder Philip Anschutz.

Anschutz, who Wednesday announced a deal to buy into Edwards Theater Circuit and earlier took over United Artists Theaters, would thus control more than 20% of all U.S. screens.

A Chapter 11 filing by Regal, which would follow at least 10 similar actions by circuits including Edwards and UA, is expected by the end of May.

Word recently circulated that the Knoxville, Tenn.-based circuit would file a reorg petition today, but that was before the Regal board directed attorneys and various other consultants to keep hunting for a scheme to bail out current owners. Regal is largely owned by investment firms Hicks, Muse, Tate & Furst and Kohlberg Kravis Roberts, who would likely take a $1 billion bath if the circuit files for reorg.

In other recent exhib reorgs — as in Chapter 11 cases generally — equity holders like Hicks, Muse and KKR are being shunted aside as debt holders gobble up circuits for little more than what’s necessary to cover secured debt. At Regal, debt exceeds $1 billion at present, about the same as what the two investment firms jointly paid in 1998 to acquire a majority stake in the company.

It’s believed that Regal CEO Mike Campbell has a small minority stake in the privately held company. But though Campbell is also chairman of the company’s board, his interests are seen tied with the Anschutz-led investors group and aligned against Hicks, Muse and KKR.

“If you’re a manager in a situation like this, all you want to do is get away from your board as quickly as possible,” observed one person close to the investors group.

A well-placed source said the Anschutz group likely would keep Campbell in place after any takeover.

“He’s done very well under some trying conditions,” the source said.

Chapter 11 not forced

Anschutz is collaborating with investors including Oaktree Capital, the L.A.-based buyout fund that’s also partnering with him on the Edwards takeover. Others participating in the Regal investors group — which has snapped up some $650 million in distressed debt that’s expected to convert to equity in a reorg — include Putnam Investments and Tudor Investment.

The group has been holding off from forcing a Chapter 11 action at Regal because voluntary filings are considered more expeditious. But though Regal’s balance sheet is so bedraggled by debt pressures that some sort of reorg filing is considered a foregone conclusion, the company Thursday declined to say when — or even if — a Chapter 11 petition might be filed.

“Our partners and outside consultants continue to assist us in evaluating the various industry initiatives available to our company,” Regal said in a statement. “There has not been any decision made in regards to a potential restructuring under Chapter 11.”

But despite foot-dragging by the Regal board, observers say there’s little Hicks, Muse and KKR can do to protect their interests.

Closures likely

Meanwhile, one outgrowth of a Regal reorg likely would be a stepped-up campaign of theater closures. Like other big movie chains, Regal has fallen into financial disarray — including defaults on a number of debt covenants — largely because of aggressive multiplex-building that lacked a compensating closure of older, unprofitable theaters.

Circuits previously filing for reorg have used the bankruptcy proceedings to break long-term leases on undesirable properties, and Regal can be expected to follow form. The company already has closed some 94 theaters with 626 screens over the past 16 months, but it also has opened 19 theaters with 294 screens during the same period.

The moves have led to a modest decline in its screen count. Regal operates 354 theaters with 4,067 screens.

But adding even a downsized Regal to the other exhib assets Anschutz and his partners control would place under one umbrella as many as 6,000-plus screens — an unprecedented hold on U.S. exhibition.

It remains to be seen whether that translates into operating advantages.

“Theoretically, Anschutz would be able to control ticket prices, but I think the marketplace is such that he would run into state antitrust problems and other difficulties,” said analyst Arthur Rockwell of Rockwell Capital Management in Los Angeles.

“And as a buyer of film product, I don’t think he will necessarily have more clout, because the studios control exhibitors, not the other way around,” Rockwell added. “I mean, if you didn’t have ‘The Mummy Returns’ last weekend, you were out of business.”

What likely motivates Anschutz — a famously press-shy billionaire who’s yet to articulate his exhib strategy — likely involves the simple recognition that circuits rep a terrific bargain, the analyst said.

“I think he realizes the exhibition business is basically a good business, and he’s getting assets at an incredible discount from their true value,” Rockwell said.

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