Lehman banks on exhib biz

NEW YORK — In the latest sign of Wall Street’s growing interest in the exhibition sector, investment bank Lehman Bros. has bought Tele-Communications Inc.’s $133 million preferred stockholding in United Artists Theater Circuit.

A TCI spokeswoman confirmed the cabler’s sale of the block to Lehman, but refused to say how much TCI was paid. Lehman did not return calls seeking comment and UATC declined comment.

Lehman first lent TCI money against the value of the stock last March, but the formal sale of the block was only finalized about two weeks ago, sources say, shortly before UATC disclosed that it had hired Merrill Lynch to investigate “strategic alternatives” for the company’s ownership, including whether UATC should be sold.

Lehman, which is believed to have acquired the stake through its investment funds, appears to be betting it can turn a profit on the block if UATC is sold or its debt refinanced.

The stock carries only limited voting rights but must be redeemed if more than half of UATC’s common stock, which is majority owned by Merrill Lynch investment partnerships, is sold.

TCI owned the stock as a legacy of its ownership of the circuit, which it sold in 1992 for $543 million. The price comprised some cash, assumption of debt and issue of $92.5 million worth of preferred stock whose value has since mushroomed by $40 million in accrued dividends.

Lehman’s investment in UATC comes at a time of rising interest by financial investors — known as leveraged buyout funds — in the exhibition industry, which is seen as ripe for consolidation. Funds managed by firms like Kohlberg Kravis Roberts, Hicks, Muse, Tate & Furst and Leon Black’s Apollo Partners are considering bids for Norman Lear’s Act III Theaters, and some LBO firms are believed to be considering buying both Act III and UATC and merging the two. Lehman’s acquisition of the preferred stock throws that firm into the ring as well.

People close to UATC downplay the significance of Lehman’s purchase of the stock, arguing that ownership of the preferred shares gives the firm no ability to influence the exhibitor. The stock’s voting rights can only be exercised in relation to specific situations, such as how much debt UATC can take on, sources say.

Nevertheless the preferred stock carries a dividend rate of 14%, giving UATC plenty of incentive to redeem it with cheaper debt in any refinancing, sources say.

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