Box-Office Potential Entices Large Chains, Movie Makers

Not so long ago, a movie theater owner was likely to put on a long face and tattered clothes before meeting with a Hollywood film distributor anxious to know how well his film was doing.

The theater owner would bemoan movie attendance, insist that he was subsisting on popcorn sales--and then drive off in a Rolls-Royce. At least that’s the story Don Harris tells about the way owners once masked their theaters’ success.

The idea was “never to let the distributor know” how well the theaters were doing because the owners “might have to pay more for film rentals,” explains Harris, an executive with AMC Entertainment, the nation’s fourth-largest chain of theaters.

Historians may record 1986 as the year everyone caught on to the potential profits in movie exhibition.

Motion picture theaters are suddenly the hottest properties in entertainment after operating for nearly 40 years as the least glamorous and most fragmented aspect of show business.

The leading exhibitors are acquiring regional chains around the country and building new theaters at a furious clip. The number of screens in the United States has jumped at least 13% since 1980, according to an industry trade group.

Acquired Theater Chains

And, more significantly, the motion picture distributors themselves are entering the exhibition business to reap new profits and extend their control over their costly films’ destiny. Five distributors--Universal, Paramount, Cannon Group, Columbia and Tri-Star Pictures--have acquired theater chains or announced deals since January.

It is the distributors’ first foray into exhibition since antitrust lawsuits broke up the old studio monopolies in the late 1940s and early 1950s. Alarmists fear a return to Hollywood’s monopoly on local movie palaces and prices, but a number of industry experts scoff at such concern. For now, attention is focused on which theater chains will merge and who’ll wind up as the industry’s biggest players.

Jim Sheehan, president of Mann Theatres Corp. of California, predicts that mergers and acquisitions will accelerate and peak in the “next year or so, because the industry is hot, and there does seem to be this merger mania throughout the country.”

“This is top-dollar time,” says Thomas Sherak, a former film buyer who is now president of domestic distribution and marketing for 20th Century Fox Film Corp.

Yet the stampede perplexes some onlookers who question whether theater ownership is a “growth” industry. Theater attendance in the United States has ebbed in the past 18 months, down from the 1984 peak of nearly 1.2 billion admissions. Videocassette rentals are accused of robbing box-office business. And some pundits predict that “over-screened” markets will backfire on exhibitors if price wars erupt or movie makers cut back their production volume.

So why buy now?

“It’s a good time to consolidate because it’s at the end of a generation,” says Garth Drabinsky, president and chief executive of Cineplex Odeon Corp., an upstart company that more than doubled its screens by acquiring Plitt Theatres Group last November. The move made Cineplex one of the continent’s four largest circuits, and it has recently acquired two more chains. Drabinsky says he can improve an old theater company’s profits by 40%.

“By and large, the industry has been run by family operations on a regional basis since the breakup of the theaters and distribution in the late ‘40s, early ‘50s,” Drabinsky says. In his view, the sons and daughters of many theater owners don’t want to take over the family business. The aging owners, faced with the choice of making costly repairs or watching their theaters decline, are opting to sell now.

The most ambitious chains, intent on increasing their market share, are anxious to acquire these regional operations, or circuits, as they are called in the industry. In less than a year, for example, Cineplex has gained control of an estimated 60% or more of the screens in Chicago through its acquisitions of Plitt and Essaness Theatres Corp.

In the city of Boston, recent acquisitions have made USA Cinemas the sole owner of all first-run theaters (excepting X-rated or martial-arts houses).

In Denver, Mann Theatres strengthened its market share by swapping its Northern California screens for General Cinema’s Denver theaters.

Motion picture distributors, however, appear to have more complex motives for re-entering the business. While studio executives prefer to describe their theater acquisitions simply as “good investments,” outsiders and analysts are more blunt about the strategies behind the move.

“Distributors are coming in to control their films in the marketplace,” says Martin Romm, a securities analyst for First Boston Corp. in New York.

A. D. Murphy, a USC adjunct professor and industry analyst for the trade publication Variety, says distributors have two compelling reasons to re-enter exhibition. Obviously they profit “from the money that comes back from it,” Murphy says, but distributors also covet greater control of theaters that serve as the “launching platform” for a movie’s journey through the distribution pipeline. A movie’s box-office visibility usually determines how well it sells further down the line when it is released on videocassettes, pay television, commercial TV and foreign theatrical markets.

Can Nurture Films

If distributors own theaters, they’ll be in a position to nurture a film that might otherwise be dismissed as mediocre. “It’s not mollycoddling; it’s marketing,” Murphy says.

The timing of the distributors’ move into exhibition is nearly as intriguing as their motive. Some onlookers assume the motion picture companies are acting now because the Reagan Administration appears unconcerned about “vertical integration.” That’s the antitrust term for control of two or more levels of the production-distribution-retailing chain in a business.

“A lot of it has to do with the political environment,” Fox’s Sherak says.

“It should be viewed (as vertical integration). So what?” says Drabinsky of Cineplex, whose company recently sold half its stock to MCA Inc., the parent of Universal, a major producer and distributor.

“Vertical integration is not necessarily a problem under antitrust law,” explains Fred Haynes, assistant chief of the Justice Department’s antitrust section that monitors the motion picture industry. It becomes an issue if the government suspects that it is facilitating collusion between companies, he says, or if newcomers contend that vertically integrated companies make it more difficult to launch either a distribution or exhibition business.

Haynes and other antitrust specialists point out that the dismantling of major distribution-exhibition companies in the 1940s and 1950s occurred not because they were vertically integrated but because they conspired to fix prices in local markets.

Understandably, movie-goers today won’t recall much about the “Paramount” decrees, other than the fact that Hollywood monopolies were broken up. The Justice Department first sued in 1938, but 10 years passed before the majors began settling the cases by signing agreements, or consent decrees.

Robert J. Rose, a Los Angeles attorney who specializes in motion picture antitrust law, explains that only three distributors--Warner Bros., 20th Century Fox Film and MGM--are actually barred from re-entering the exhibition business.

Paramount Pictures and Radio-Keith-Orpheum Corp. were also forced to break up distribution and exhibition, but their surviving distribution companies were not barred from re-entering the theater business--perhaps because they were first to settle their cases, Rose says.

Three distributors--Universal, Columbia Pictures and United Artists--owned no theaters at the time, so they weren’t barred from the exhibition business.

Nevertheless, all of the majors avoided multiple theater ownership until 1981, when Columbia Pictures Industries acquired 31% of Walter Reade Organization, a small circuit in New York.

The investment “was not terribly visionary. I don’t think we were intending at that point to integrate in exhibition,” says Francis T. Vincent Jr., chairman and chief executive of Columbia Pictures Industries, now a subsidiary of Coca-Cola Co.

“We were interested in knowing more about (theaters)” and gaining “outlets in the East Side of Manhattan,” Vincent says.

The Columbia chairman says he doubts that his studio will acquire more theaters, because Columbia and Coca-Cola are earnings-conscious. “Prices are so high, you really have to wait a long time to generate earnings,” he says.

Yet Columbia owns a 43% stake in Tri-Star Pictures, which announced plans earlier this month to acquire the United Artists Communications circuit, second only to General Cinema in its number of screens. Tri-Star is reportedly prepared to pay between $450 million and $500 million, but the deal depends on Tele-Communications Inc.’s takeover of UA Communications. (TCI announced last week that it has agreed to acquire 51% of UA Communications but wants to keep just its cable-TV properties.)

Vincent says theater ownership makes sense for Tri-Star. The 4-year-old film company “needs diversification,” he says, and theater ownership will help “build its presence.”

Columbia gradually increased its holdings in Walter Reade and paid nearly $17 million for the remaining 58% in January.

But the rash of big deals actually began last July, when Loews Corp. sold its theater circuit for $158 million to Los Angeles businessman Jerry Perenchio and Bernard Myerson, the circuit’s longtime president who has a minority stake.

“We didn’t know that this was going to happen. We’re not geniuses,” Myerson says of the escalating values. None of Myerson’s children followed him into exhibition, but the 68-year-old executive says he and Perenchio “are having too much fun working. . . . We haven’t considered selling it.”

Although the Loews circuit operates in just six states, it is the most prestigious circuit in Manhattan. Film companies want their movies to open in a Loews theater, and Myerson boasts that the circuit grosses more money, per seat, than any other circuit.

Similarly, the Mann chain dominates the Los Angeles market because it has nine screens in Westwood Village, where film makers and stars traditionally want their films shown.

As a result, Mann--ranked eighth nationally--is a hotly pursued company. Chairman Ted Mann has no children in the business and built and sold a Midwestern circuit earlier in his career. But Sheehan, Mann’s president, insists that “the company is not for sale and has never been for sale.”

In San Francisco, Marshall and Robert Naify have agreed to sell their 51% stake in United Artists Communications, founded by their father in 1926. The two men, 65 and 63 respectively, have not discussed their reasons for selling, but negotiations stretched over 11 months, according to an investment banker at Allen & Co. who worked on the complex deal.

Most theater circuits are privately held and disclose little information about their financial condition. But McKinsey & Co., which did a broad study of the theater business for 20th Century Fox in 1982, found that, on average, exhibitors enjoyed a 45% gross profit margin on box-office admissions and a 59% gross margin on concession sales.

The four largest circuits, however, are owned by companies whose shares trade on stock exchanges. Their public filings disclose a wide range in profits and top executive salaries.

The Naify brothers, for example, each collected a salary and bonuses exceeding $1 million last year from UA Communications. The company--which also owns the nation’s 12th-largest cable-TV operation--reported net income of $15 million on revenue of $480 million in 1985.

General Cinema, headquartered in Chestnut Hill, Mass., said its theater division generated operating earnings of $29 million last year, down 23% from the previous year, when a record $38 million was reported. General Cinema Chairman Richard A. Smith collected cash compensation of $577,500.

Cineplex, which also owns a studio and distribution company in Canada, reported 1985 net income of $14 million (Canadian) on revenue of $162 million (Canadian). In U.S. currency, the results would have been net income of $10 million on revenues of $115 million.

Kansas City-based AMC Entertainment is the only major exhibitor that has no other holdings, making it the industry’s “pure play” on the stock market. In its last fiscal year, AMC reported earnings of $7.8 million, down 40% from the previous year, even though revenue rose slightly to $249 million.

Stanley H. Durwood, AMC’s chairman and chief executive, attributes the reduced earnings to a dearth of popular films last year and AMC’s aggressive expansion. Last year, the company added 146 screens and plans to open 280 new screens in its current fiscal year. He collected a 1985 salary of $367,968.

Durwood has worked relentlessly to build a national chain since 1965, when he bought out his brother’s and sister’s interests in their father’s theaters.

He says at the time that he thought he’d have a competitive jump of “about five years” before others followed his lead in building multi-screened theaters in enclosed shopping malls. Competition was slower to materialize, but “it’s no secret any more,” Durwood says. “These big movers . . . have stopped denegrating the theater (business).”

Nevertheless, the AMC chairman says he’s not worried by distributors’ re-entry. “We’ve got different ballplayers on the field; it’s the same game.”

Shifting metaphors, Durwood says, “We look at our company like a barge. It’s wide and flat and steady.”

Variety analyst Murphy might agree. He notes that for 25 years, theaters have sold about 1 billion tickets annually, despite the advent of pay-TV cable, video games and videocassettes. “There are very few things that have been stable for 25 years,” he says. Unless the new buyers make poor business decisions, Murphy says, “I don’t see any severe downside.”

The industry’s leaders have wrung greater profits out of their theaters by building more and more screens in one theater, reducing overhead and personnel. By showing six to 12 different movies at a time, the exhibitor is likely to have a hit more often.

Financing the rapid expansion has prompted some companies to go public or seek wealthy investors. Cineplex Odeon did both, and Drabinsky, the company president, seems elated by his alliance with MCA. Cineplex gained access not only to MCA’s deep pockets but to its powerful corporate management. Distributors make the best partners, he argues, because they have the greatest concern for a film’s display.

By participating in exhibition, and receiving more revenue at the start, distributors might be more willing to delay a film’s release to the videocassette market, Drabinsky says. That delay could benefit both the theater owner and the distributor, he says.

“It’s a question of the distributors (regaining) a much greater control over the economic destiny of their product,” he says, noting that the major motion picture companies do not control newer forms of distribution, be it videocassette rentals, pay-television or commercial TV networks.

With their competitors buying up theaters, the three distributors still barred from exhibition by those 1950-era antitrust consent decrees now appear ready to ask the Justice Department and federal court to set aside those orders.

Geoffrey W. Holmes, a vice president at Warner Communications (Warner Bros.’ parent), says the company has discussed the matter with Justice Department officials. He declined to elaborate.

Fox Chairman and Chief Executive Barry Diller says his company will support Warner’s efforts to set aside the ban on exhibition, although acquiring theater circuits is not his highest priority. “We have some but not a great deal of interest in theaters. We think . . . managing them is a genuinely different field than managing a motion picture company.”

Will Seek Best Theaters

Most of MGM, still under the decree, is being acquired by United Artists Corp., which is not affiliated with UA Communications. Chairman Lee Rich says he’ll also support Warner’s efforts at the Justice Department. As for acquiring theaters, he says, “I have interest in anything that will make this a better company.”

Film distributors insist that they’ll continue to seek the best theaters for their movies, whether or not those screens are owned by another subsidiary.

At MCA, Universal Pictures Distribution President William C. Soady points out that no single circuit is large enough to handle all of the movie prints Universal must release. He says General Cinema is Universal’s largest customer, yet it handles just “10% to 12% of our business.”

From a national perspective, Soady says he finds the market very competitive. “The top 10 exhibitors may represent 60%” of the screens sought by Universal.

At the Justice Department, however, “we feel that the exhibition market ought to be looked at city by city,” Haynes says. “We are concerned about concentration in the exhibition business, and I think that’s reflected in our bringing a case in Las Vegas.”

The antitrust division attorney alluded to a civil antitrust case filed last month against Syufy Enterprises of San Francisco. In its suit, the Justice Department contends that Syufy has attempted to monopolize first-run motion picture exhibition in Las Vegas since 1982.

Haynes says the department has “other investigations of acquisitions, but we’re not in a position to comment on the specifics.”

SIGNIFICANT THEATER DEALS IN THE PAST YEAR Number Exhibitor of Date of New investor acquired screens purchase Tri-Star Pictures* United Artists 1,200 proposed Communications MCA* Cineplex Odeon (50%) 1,176 May ’86 Jerry Perenchio- Loews 215 July ’85 led investor group Cineplex Odeon Plitt 608 Nov. ’85 Cannon Group* Commonwealth 425 June ’86 Cannon Group* Screen 287 pending Entertainment (U.K.) Columbia Pictures* Walter Reade (58%) (N.Y.) 11 Jan. ’86 Paramount Pictures* Trans-Lux (N.Y.-Conn.) 24 pending Cineplex Odeon Esssaness (Chicago) 41 May ’86 Cineplex Odeon Septum (Atlanta) 48 April ’86 AMC Entertainment RKO-Mid America 34 Dec. ’85 Theatres of St. Louis AMC Entertainment Suburban Theatres (Detroit) 27 May ’86

Price Tri-Star Pictures $450-500 million MCA $159 million Jerry Perenchio $158 million Cineplex Odeon $65 million Cannon Group $24 million Cannon Group Not available Columbia Pictures $17 million Paramount Pictures $15 million Cineplex Odeon $14 million Cineplex Odeon $8 million AMC Entertainment Not available AMC Entertainment Not available

* Motion picture distributors.