NEW YORK — In the latest sign that merger activity in the exhibition industry is heating up, United Artists Theatre Group is expected to announce as early as today that it is reviewing its “strategic alternatives,” including whether to do a public stock offering or possibly offer itself for sale.
Merrill Lynch, whose investment funds are the major shareholders in UA, is undertaking the review for the exhib, which ranks No. 2 behind Carmike Cinemas. UA operates 2,289 screens at 369 theaters.
UA has been struggling in the past couple of years as better-financed competitors like Carmike Cinemas, Regal Cinemas and AMC Entertainment expand through intense building and acquisition programs.
UA’s ability to respond has been limited by its $400 million debt load left over from its 1992 leveraged buyout led by Merrill Lynch investment funds, although the exhibitor has lately stepped up efforts to renovate its circuit.
Given this history, many on Wall Street will likely jump to the conclusion that the only item on UA’s agenda is a sale, but UA execs insist that’s not the case. UA’s shareholders may sell if offered a good price, sources say, but UA COO Kurt Hall said Friday the issues to be examined also include whether the exhib should refinance its $400 million of debt and $142 million of preferred stock to reduce interest expense, whether to do a public offering or find a merger partner.
Still, UA’s decision to review its alternatives was at least partly prompted by the increased deal activity in the industry. Sony Corp’s theaters group is currently negotiating a merger deal with Cineplex Odeon Corp., and Norman Lear recently hired investment bankers Donaldson Lufkin Jenrette to scout out potential investors or buyers for his Act III Theaters.
“There is a lot going on out there with people merging and other companies up for sale, so we are reviewing all of our options,” one person close to UA said.
Hall said the review has been facilitated by the exhib’s restructuring done earlier this year. UA cut its corporate expenses by 25%, yielding $10 million extra a year, and it has successfully sold or agreed to sell several of its international properties.
Earlier this month, it announced plans to sell 70 underperforming domestic theaters while pumping $175 million into new and renovated theaters in key markets like New York, Philadelphia and San Francisco.
“Our operations have gotten much better,” Hall said. At the same time, the booming state of the stock market and growing interest in the industry has raised valuation levels and brought financial investors into the market looking for deals, bankers say, making a refinancing or some other deal easier to do.
On Wall Street, exhibitors are “trading at the higher end of the historical trading range,” Furman Selz analyst Stewart Halpern said. Whereas exhibs have sold at 6-7 times cash flow (or earnings before interest, taxes, depreciation and amortization), now the stocks are trading at 7-8 times cash flow.
Given UA’s 1996 cash flow of $73 million, the current environment could value UA at close to $600 million, although the size of its debt and preferred stock leaves little room for stockholders to recover much money. The 1992 buyout of UA cost $680 million.
UA, like several other major exhibs, had a tough June quarter as a result of increased film rental costs caused by the quick burnout of major releases like “Lost World” and “Batman & Robin.” Further consolidation could well enhance the exhib’s bargaining power with distributors, an idea surely not lost on those exhibs thinking about growing through merger or acquisition.
Some on Wall Street think UA is making its move at the wrong time. Stonington Partners, the management firm that oversees Merrill Lynch’s investment in the exhib, has shopped the company before, bankers say, without success. UA’s circuit is bigger and not as well maintained as many others, including Norman Lear’s highly regarded Act III, which has already got the attention of many investors, bankers say.
But the Sony-Cineplex merger and sale of Act III is expected to break a logjam which has held up long-awaited consolidation, says one person close to UA. “The opportunities for something to happen are stronger now,” the person said.
Hall stressed the financial benefits that could flow from even a refinancing. UA has $125 million in bonds outstanding which carry interest costs of 11.5%, and its preferred stock has a dividend rate of 14%. The current interest rate environment would allow the exhib to significantly reduce the interest rate it pays on its debt, Hall said.
Principal repayments began on the company’s bank debt last December, so a refinancing could also lengthen out the timetable for repayment.