The Rank Organisation is often portrayed as the sleeping giant of entertainment. But the behemoth is hardly dozing.
Gross revenues for the company that owns Pinewood Studios, Deluxe Labs, the Odeon cinema circuit and the world’s biggest video duplication business are £2.3 billion ($4 billion) this year. Since 1983, revenues have more than tripled, earnings per share have quadrupled and trading profits have multiplied sixfold.
Driving the growth has been a string of hefty acquisitions, culminating in last year’s purchase of the Mecca Organisation in the U.K. That deal cost Rank £895 million ($1.5 billion) and brought Rank’s capital outlay since 1984 to more than £2 billion ($3.4 billion). Some slumber.
But the long list of opportunities Rank hasn’t bought into – perhaps accounting for its languorous rep – may be just as important to its performance. Company has turned down a host of cash-seeking U.S. film companies, rumored to include MGM, Orion and Carolco, and has opted out of the race for a commercial tv franchise in the U.K. Early approaches from satellite tv consortium BSB were likewise spurned and the company has resisted pressure to increase investment in film rights.
The jury still is out on the value of some of Rank’s acquisitions and the recession could delay recoupment of investment, but the general view among U.K. analysts is that Rank, formerly an underperforming and rudderless amalgam of disparate enterprises, is now a more coherent and efficient business.
Credit for this transformation mostly goes to Michael Gifford, who took over as chief executive in 1983.
A straight dealer
A bluff and aggressive 55-year-old, Gifford is said by middle-ranking Rank execs to be decisive and straight-dealing. One contrasted Gifford’s collegiate style – taking advice from all comers and welcoming contrary opinions – with that of his predecessor, Sir John Davies, who reputedly required total obedience from his staff.
Over lunch at the Rank-owned Athenaeum Hotel in London’s Piccadilly, Gifford impresses as a man who probably doesn’t suffer fools at all, never mind gladly, but who is relaxed and comfortably in control of his empire.
Gifford says he has a simple objective: to achieve above average earnings per share while maintaining a prudent balance sheet.
“We are in the business of making money, not movies,” he says firmly.
Earnings per share have in fact taken a knock since the acquisition of Mecca, which was largely paid for by the issue of new ordinary and convertible preference shares and the assumption of debt. According to one analyst, it could take until 1994 for the earnings per share to recover. The balance sheet, however, is in good shape.
“Rank wasn’t making money before Gifford arrived,” says Jane Anscombe, leisure analyst at Barclays de Zoete Wedd. “Between 1983 and 1986 he pruned it and straightened it out. By and large, the record has been very good.”
In the first four months of this year the company’s stock has outperformed a strongly rising market, reflecting investor confidence that Rank is well-placed to benefit from an end to the recession.
So why Rank’s reputation for lethargy? It seems to arise from two factors: a management style that eschews hoopla – Rank execs are number-crunchers, not showmen – and a seeming aversion to high-profile risk-taking:
* Gifford decided against bidding for a Channel 3 franchise because he takes a dim view of the future of commercial television in the U.K.
Originally, Rank had wanted to launch a Canal Plus-type pay-tv film channel on the yet-to-be-launched Channel 5. Plan was squashed by the advent of BSB and Sky. Subsequent (unsuccessful) bid for Granada, which owns the commercial tv franchise for the northwest of England, led to speculation that Rank was interested in tv. But bid was aimed, says Gifford, at Granada’s non-tv businesses, which include bingo halls and roadside service stations.
Gifford believes that net advertising revenues will decline in all the Channel 3 regions other than the south of England, where because of transmission difficulties Channel 5 will not be able to compete with Channel 3 for revenue.
* He turned down BSB because he takes a similarly pessimistic view of the chances for satellite tv.
“We spent a lot of time looking at its prospects and our projections were remarkably accurate,” he says. Per Gifford, BSkyB, Channel 3 and Channel 5 will be competing for a diminishing tv audience, making commercial tv a poor prospect in the U.K.
Rank switched its attention to video, moving into (and quickly out of) direct distribution and building its cassette duplication business.
* He spurned offers of equity stakes in a succession of U.S. film companies because he doesn’t believe that film production is a good investment.
“Name even one company in the last 50 years with uninterrupted growth in earnings from investing in the entertainment industry,” challenges Gifford. “There is not one of which I am aware. There must have been 50 companies who have had ambitions in entertainment and all have suffered severe setbacks in their financial affairs.”
Gifford will not be drawn into naming names, but clearly he believes there are lessons to be learned from the demise of Thorn EMI Screen Entertainment, Goldcrest (in its earlier incarnation) and the dozen or so U.S. independents that have come and gone in the last 10 years. He notes that of the major studios only Disney is still in the hands of its original owners.
Another reason for steering clear of investment in film companies, per Gifford, is that Rank doesn’t want to “compete in distribution with the people we service in the labs.”
* He has steered Rank away from large-scale multiplex investment in the U.K. because he believes the costs involved are prohibitive.
“No one knows how to take the cost out of the present system,” he says. “Building a multiplex is an expensive undertaking and the big multiplexes don’t get the returns. Admissions yes, but returns no.”
Rank is now thinking small, looking at miniplexes that can cater to smaller populations.
* He has stuck resolutely to company policy of not getting involved in development or production, in spite of the name-calling to which Rank has been subjected by aggrieved British producers looking for coin.
Jim Daly, managing director of Rank’s film and tv services division states categorically: “We are not filmmakers. We don’t believe we have creative talent.”
* Gifford hasn’t even come close to fully investing Rank’s $100 million revolving fund for film acquisition because there are not enough projects that meet his investment criteria.
“The fund has been substantially underused not because of unwillingness to invest… but because the opportunities to invest are not there,” says Daly.
Rank acquires films for distribution in the U.K. and foreign markets, but first expects those films to have studio distribution in the U.S., known talent on both sides of the camera and presales potential. In addition, Rank looks for a deal in which it can cross-collateralize revenues across many titles, media or territories.
Gifford also is taking a relaxed view of an investment opportunity that has consistently failed to come to fruition: Universal Studios Europe. Per Gifford, he has yet to see a business plan for the venture “that is attractive enough for us to make the investment. There have been dozens of business plans but none has been attractive enough to me.”
All this nay-saying has given Rank the reputation of being ultra-cautious, especially among British film producers who are ever in search of investment coin and who have never forgiven Rank for pulling out of film production in 1982.
What Gifford has done instead is bolster the businesses that take money out of the budgets and the revenue streams rather than out of the profits of film and tv productions. Hence the consolidation of the company’s leading positions in processing, duplication and production facilities.
Barclays de Zoete Wedd’s Anscombe forecasts pretax profits next year of £323 million. Bruce Jones at Smith New Court puts the figure at £322 million. James Capel’s Max Dolding, who says he is happier with Rank now than he was earlier in the year, made a forecast in February of £305 million. And Panmure Gordon’s Nigel Hicks, who since March has been advising investors to sell Rank stock, has predicted earnings of £295 million.
The average figure of the four analysts, all of whom believe the first-half figures will be poor, is £311 million – almost unchanged from last year’s £312 million.
“In current trading conditions most businesses will be doing well if they repeat last year’s figures,” says Anscombe, who notes that the full benefits of the Mecca acquisition and of Rank’s 50% stake in U Studios Florida, which has been open less than a year, will be felt further downstream.
While admitting that “massive unrealized value” could still be locked in Rank’s recent acquisitions, Hicks maintains that the underlying performance of Rank’s established businesses is poor, with flat or even declining profits. He believes that further pruning is needed to make the company “more focused.”
Among the unwanted baggage that Gifford already has disposed of are joint ventures in Australia and New Zealand, yacht marinas, a military thermal imaging business and an investment in U.S. telephone systems. Per Hicks, these disposals have netted about £338 million ($575 million). Gifford puts the total somewhat higher, at £450 million ($765 million).
The company is one of the largest leisure businesses in the world and a market leader in film and tv services. Besides the world’s biggest videocassette duplication business, Rank owns the world’s second-largest film processing business, the second-largest cinema chain in the U.K. and the second-largest video racking business in the U.S. In addition, it has a film distribution business, a foreign sales operation, a film and tv lighting company and a tv equipment manufacturer.
These activities, comprising Rank’s film and tv services division, provide only about 40% of the gross revenues of the company’s managed businesses as a whole and about 23% of their trading profits. The other directly managed businesses include hotels, bingo halls, casinos, holiday parks, leisure centers and freeway service stations.
No responsibility, big profits
Rank’s biggest profits-earner is its 50% stake in a company for which it has no management responsibility at all, Rank Xerox, which last year contributed 49% of earnings per share. Gifford would love to sell the stake in Xerox, but the only taker would be Xerox itself, which, so far, has not been able to pony up the $1 billion asking price.
Xerox apart, many U.K. analysts believe that the Rank mix makes sense. Anscombe, for example, describes Mecca as a “super strategic fit” for Rank, adding that “Mecca’s problems were with its balance sheet, which is a problem that Rank doesn’t have.”
For the future, Gifford expects “more natural growth than acquisition.” He promises to do “nothing exotic” over the next three to five years.
“We don’t have to do anything special to achieve satisfactory growth in earnings,” he explains before adding that “no one is able to predict the lunatic who wants to buy one of our businesses for three or four times its worth. If such an offer were made we would sell. Then we might need to replace that asset.”