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Dumping debt and maxing out capacity turns around exhibs' fortunes

Exhibs have shown a penchant for high drama on their balance sheets.

Wall Street is embracing the new-look exhibs that have emerged from the bloated and bankruptcy-plagued biz of the recent past. Its reversal of fortune can largely be traced to a dual strategy of unloading debt that had been piling up since the mid-’90s and squeezing efficiency from seating capacity. That has helped the industry recover from a building spree that improved the moviegoing experience but carried a significant pricetag.

“All over the country, you had these megaplexes with digital sound and stadium seating that caused a spike in the number of screens in the U.S.,” says Anthony DiClemente, a Gotham-based media analyst with Lehman Brothers. That screen count led to a decline in key metrics such as B.O. revenue, cash flow and attendance per screen that even large exhib chains had a hard time coping with.

Regal Entertainment Group chief financial officer Amy Miles estimates that more than $5 billion was spent during the late-’90s megaplex building boom, which saw an accelerated mothballing of underperforming multiplexes saddled with long-term leases and screen counts that were running two to three times the long-term growth rate.

When Regal filed for Chapter 11 bankruptcy protection in 2001, the world’s largest exhibitor closed slightly less than 1,900 screens across the chain, including United Artists and Edwards facilities, in hopes of erasing $2 billion in red ink.

Since going public in May 2002, Miles says Regal has generated a more than 90% return on investment for stockholders who bought at less than $12 a share in the IPO and stayed the course into the 2004 fiscal year. She says new coin can be used for acquisitions, shareholder dividends and prudent building now that the industry’s rate of replacement for theaters is back to the 1% to 3% range.

Regal’s adjusted earnings before interest, taxes, depreciation and amortization per screen has increased roughly 45% between fiscal years 2001 and 2004, while attendance per screen rose about 5% in the same period.

Peter Brown, CEO of AMC Entertainment, traces the tidal wave of capital expenditures to May 1995, when the nation’s No. 2 exhib built the first megaplex in Dallas.

“This really set the industry on its ear in terms of identifying the next short format,” he says. “It took a lot of exhibitors into a very negative free-cash-flow cycle, and with most of the heavy capital spending now behind us, we’re all generating substantial amounts of free cash flow, which is the nicest financial characteristic about the business of theatrical exhibition.”

It’s also caught the attention of investors. Within the past year, three of the nation’s top exhibitors were acquired by private consortiums, which typically operate under a longer financial timeline than publicly held companies. AMC is now in the hands of J.P. Morgan Partners and Apollo Management affiliates. Loews Cineplex Entertainment Corp. went with Bain Capital, the Carlyle Group and Spectrum Equity Investors. Cinemark USA was sold to Madison Dearborn Partners.

“For better or worse, public investors haven’t given the theater companies the credit they deserve,” says Lehman Brothers’ DiClemente, noting Regal’s highly attractive 6% dividend yield and AMC, which went public in August 1983, trading at cash-flow multiples far lower than other industries.

With a leading market share of 22% compared with about 10% for AMC, he says Regal has grown 15% on average during the past three years following an acquisition spree. Another advantage has been its digital national advertising network, which, while viewed by many consumers as annoying, has generated considerable coin. “All that money is pure profit that goes right to the bottom line,” DiClemente crows.

Peak perf

The number of screens peaked in 1999 at more than 37,000, having since edged down to slightly less than 36,000, reports the National Assn. of Theater Owners. DiClemente forecasts a relatively stable screen count, growing about 2% a year.

As for attendance figures, which are harder to predict, he’s sanguine about the future. “As long as parents want to get away from their kids and kids want to get away from their parents, the movie business is going to be a major option for people on a Friday or Saturday night,” DiClemente says.

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