Newly healthy chains dueling for better film rental terms
Often in December, several dozen Hollywood distribution chiefs and their counterparts from major U.S. movie theater chains stop bickering over splits for a few days to hunt deer and wild turkey at a ranch in Midland, Texas.
Call it Herb Allen’s Sun Valley for stadium seating. Sort of. “One of the seminars was how to eat beans over a campfire,” jokes a studio exec.
Distribs and exhibs spend much of their time fighting picture by picture, theater by theater to divvy up streams of cash from movie ticket sales.
So the Texas hunt can offer (more than a golf tournament, for example) a healthy release of pent-up hostility — as when Fox distribution prexy Bruce Snyder was asked to don a pair of antlers and run across a field.
Last year, Paramount distribution chief Wayne Lewellen wowed the group by shooting a deer at 383 feet.
Has the feat given him an edge in negotiations? “Well, they can’t run too far,” he jokes.
Exhibitors are, in fact, running — to the bank — and they’re smiling all the way. They’re once again profitable, with sizzling stocks and state-of-the-art venues.
It’s a startling turnaround from the late ’90s when a dozen chains filed for Chapter 11 in one of the most unusual cases of mass bankruptcy in corporate America.
Canny use of bankruptcy law proved magical, letting exhibs shed loss-making leases, erase debt and emerge with clean slates and rosy prospects — usually at the expense of their old investors.
Notable among the top five, AMC and Cinemark did not file for Chapter 11.
Exhibs also continued to merge.
The biggest — Regal, AMC, Cinemark, Carmike and Loews Cineplex — now control nearly half the nation’s 35,000 movie screens and an even bigger chunk of box office coin.
Regal, which is now owned by Denver billionaire Philip Anschutz, can command 20% of the total domestic gross for any one pic.
Needless to say, the negotiating position of exhibs vs. distributors looks strong going forward.
Already, without lifting a finger, exhibs reap rewards from giant $80 million-per-pic marketing budgets aimed at driving moviegoers to theaters.
As Hollywood’s investment soars, with film costs hitting the $200 million mark, exhibs, in fact, may benefit the most as studios shoulder the risk. In a crowded film market, exhibs can whisk a pic off screens if it doesn’t pay to keep it, and they move on to the next one.
“That’s my money they’re taking away. Once it’s off the screen, I get nothing,” says one distribution exec.
Exhibs have also been battling for better rental terms from Hollywood distributors, in many cases a flat split in the 50/50 range over the life of a film. (A studio’s take usually ranges from 50% to 59%.)
Talking terms is the touchiest of subjects for both exhibs and distribs. None would speak on the record, but players on each side say the flat rate, or so-called “aggregate” settlement, is starting to replace the traditional splits, in a quiet revolution.
At some chains, as many as half the film deals are now aggregate settlements.
Traditional splits, on average, had studios taking 70% of the first week’s grosses. The distributor’s share would fall and the exhibitor’s rise in subsequent weeks.
At the least, the recent shift has protected theater chains from losing their shirts as most movies now open huge on lots of screens and then burn out faster than Donald Rumsfeld’s poll numbers.
And it means distribs won’t reap the windfalls they might have if they’d been able to keep the old rules in place.
The tougher stance from exhibs comes just as Hollywood studios enter their most crucial box office season, with a plethora of summer tentpoles about to be unleashed on the popcorn public.
Each week a nightmarishly expensive pic hits the multiplex — “Van Helsing,” “Troy,” “Shrek 2” and “The Day After Tomorrow” will all be jostling against one another in the weeks ahead.
The chains are still relishing the easy money they pocketed from “The Passion of the Christ” — a surprise hit which little distrib Newmarket was in no position to demand tough terms on.
Some studio distribution chiefs say they rarely, if ever, do aggregate deals. Others are quick to point out that the average return from an aggregate deal works out to be about the same number as the final take on most pics calculated with descending splits. It’s just easier, they say. And it gives the exhibs a certain comfort level.
The last thing distribution chiefs need is for the head of a studio, or its corporate parent, to think they’ve gone soft.
“There’s not been noticeable pressure from our standpoint,” says DreamWorks distribution prexy Jim Tharp. “There is an underlying feeling that it’s there, whether exhibs use it or not, and we’ve not seen them use it. But there’s this concern that, at some point, they will try to use it.”
Exhibs insist that they don’t want to make money off the studios’ backs: They just want to maintain their historic level of returns. After all, the last thing they want to do is draw attention — from Washington, D.C., smaller rivals and assorted others — as to just how big they’ve become.
Asked if the leverage has shifted to exhibitors, Carmike chairman-CEO Michael Patrick says, “Barely.” He’d put it this way, that “the shift in favor of the distributor may have changed its course.”
Conflict is at the core of distrib-exhib relations as both sides want to walk away with the most money per pic possible. The vibe was especially sour in the ’90s with exhibs in desperate financial shape.
In 1998, chains revolted when Sony demanded an unprecedented 80% of the first week’s take for “Godzilla.”
The next year, Loews Cineplex refused to play “Star Wars: Episode I — The Phantom Menace” on its Gotham screens after a dispute with Fox over terms.
Almost to a man, Patrick and his cohorts at the other top exhibs — Loews’ Travis Reid, Cinemark’s Lee Roy Mitchell, AMC’s Peter Brown and Regal’s Kurt Hall/Michael Campbell — are the same execs who managed the exhibs through financial crises and back to health.
They were not blamed for the industry’s collapse, which has been attributed partly to overzealous expansion plans by the first round of financial backers like KKR and Hicks Muse, and partly to a string of circumstances beyond anyone’s control.
Many execs and Wall Streeters point to the year 1995, when stadium seating was first introduced and started to siphon viewers from older theaters with unexpected rapidity.
“We had theaters that dropped 50% overnight. If you had built any sloped-floored theaters between ’85 and ’95, you were sitting on an asset that was obsolete,” says Regal’s Hall. “You could go from a million in cash flow to negative in a day” at theaters that should have been viable for another decade.
Enabled by abundant financing, exhibs ramped up new construction. The five major chains spent more than $4 billion building theaters between 1996 and 1999. Since they couldn’t dump their old leases, screen count rose much faster than revenue.
With cash readily available to everyone in the industry, “even a small company with a few screens could do a hundred-million-dollar bond offering and start building,” says one exec. Exhibs poached each other’s markets and sometimes built too close together or in dubious locations.
A dip in ticket sales in 2000-2001 was the last blow to shaky balance sheets.
“If you were a CEO in 1997 or 1998, you were damned if you did and damned if you didn’t,” says one exhibition exec. “You had a confluence of capital and new technology coming into the market at the same time: I felt like a trout trying to swim upstream during the spring runoff.”
Chapter 11 allowed exhibs to wipe out leases on those outdated theaters and start fresh.
Even so, the industry’s speedy recovery has surprised everyone from the studios who rent them movies to the Wall Streeters who trade, and tout, their stocks.
“Regal’s track record over the past three years has been impeccable,” says Anthony DiClemente of Lehman Bros.
“There’s smart money behind the company now,” he adds, referring to Anschutz, who snatched control from KKR by buying up distressed bonds of the bankrupt chain for pennies on the dollar. Now he can sit back and enjoy the ride.
Regal’s debt is low enough that Anschutz could afford to entice investors and give himself a generous present by offering a hefty special dividend of $5 a share two years in a row.
Shareholders may need the incentive, since, despite their general health, the movie theater biz is mature and not expecting explosive growth.
The recent rally aside, generally “they’re tortoise-like stocks. They may not win the race, but they’re very steady,” says Stuart Halpern of RBC Capital Markets.
Sales from inhouse divisions that are aggressively pursuing advertising and alternative uses for theaters — like concerts and community events — are expected to grow faster than traditional theatrical revenue.
The package seems to appeal.
Suitors lined up earlier this year for the privilege of buying Cinemark, which was sold to investment group Madison Dearborn for $1.5 billion. Ditto for Loews Cineplex, which owners Oaktree Capital and Onex Corp. recently put on the auction block.
“It’s been an interesting ride,” says Regal’s Campbell. Since he founded the company in 1989, it’s been private twice and public twice.
“I probably wouldn’t want to trade the experience for anything. But I’m not sure I’d want to relive it either.”