Critics Are Not Amused by Rank Group : Poor Results at the Wide-Ranging British Leisure Giant Draw Fire From Analysts

LONDON —  British leisure company Rank Group, which charts its history back to the earliest days of the movie industry and still enjoys close ties to Hollywood, is under fire here from critics who complain that its sprawling business empire is too diverse.

Disillusionment with the company, whose businesses range from Hard Rock Cafe to film laboratories and bingo halls, reached a peak in Britain’s investment community and financial press just before Rank’s six-month results were released in August. Rumors started to circulate that Chief Executive Andrew Teare would not last the year and that a takeover bid was imminent.

Although Teare has so far hung on to his job, the interim results were disappointing. That forced analysts to downgrade their estimates for the full year. Takeover speculation remains as the company’s share price continues to look cheap.

Many financial analysts and investors believe Rank should return to its roots in the movie industry.

But the company prefers to divide its activities into two main businesses, one being the highly profitable Deluxe Entertainment Services, which includes film labs, video duplication and the Pinewood Studios, where founder J. Arthur Rank began film production in 1936 to spread the Methodist religion. More recently, the site has been used to spread the gospel of action movies through titles such as “Mission: Impossible,” the James Bond films and “Batman.”

Everything else is grouped under the heading Leisure & Entertainment and includes a range of peculiarly British pursuits such as pubs, bingo halls and caravan holidays. It also includes the Odeon chain of movie houses, the biggest and oldest in Britain.

The company’s Butlin’s holiday camps have been associated with cheap, regimented family holidays organized by permanently cheerful staff for more than 60 years. The Hard Rock Cafe brand, a 50% stake in the Universal Studios theme park in Orlando, Fla., Resorts USA (which runs campgrounds and time-share accommodations) and a string of casinos and nightclubs are included in the same business area.

As one analyst put it, “Rank is basically a property portfolio.”

Teare has spent more than $2.5 billion on investments. New multiplex movie houses and renovation of some of its 76 Odeon cinemas contributed to capital expenditures.

Speculation Over Potential Bidders

Analyst Richard Harwood at stockbroker Collins Stewart in London believes it would make sense for the company to combine the Odeon cinemas into one division with Deluxe.

“It should float off Butlin’s and Hard Rock and return to its roots,” he said.

The company is expected to sell its 53 nightclubs, its U.S. holiday business and parts of its British holiday operations. Some analysts believe an American venture capital group or financiers Kohlberg Kravis Roberts might consider bidding for Rank. Analysts have also speculated that British media group Granada could also be a potential bidder.

If the group were broken up, the price tag on Deluxe Entertainment Services would be steep, perhaps as high as $2 billion. In the first six months of the year, Deluxe’s operating profit rose 45%, exceeding the group’s 12% increase.

Rank’s Deluxe Laboratories in Hollywood claims to be the longest continuously operating film-processing company. Its clients include Columbia Pictures, 20th Century Fox, Metro-Goldwyn-Mayer, Miramax, Paramount Pictures and Universal Pictures. Some analysts argue that it would make sense for one of these big names to buy Deluxe.

Phil Clement, Deluxe’s managing director, disagrees. “The skill sets are quite different,” he says. “We’re in manufacturing, not in trying to spot a good movie when we see one. Our business and the movie-making business are both cash-hungry; the movie makers need to keep cash available to make movies. We’re there to help the creative people be creative.”

Nor does Clement see a problem with being part of a group that has diverse interests.

“No one says General Electric is too diverse because it has a wide range of products. On the positive side, Rank’s involvement with Odeon gives clients comfort because they know we’ve been in the business for over 60 years,” he said.

Clement is bullish about Deluxe’s prospects. He says the film-processing business has been helped by a trend toward wider release of movies in the U.S. Another recent pattern toward longer-running movies has also helped.

Deluxe, which has labs in Hollywood, London and Toronto, is weighing whether to expand into Asia.

“The region is in financial turmoil and there are a lot of cheap companies out there. The question is how much cheaper they will get, and whether the local market can develop within the financial turmoil,” Clement says.

Deluxe has about 30% of the video duplication market in the U.S. Clement has promised analysts that he will buy a digital videodisc business and, although he says he has not found the right one yet, aims to make an acquisition next year. He is just as keen to expand the logistics side of the business by offering customers a supply-chain management service that takes care of transporting videos from the factory to individual stores.

Pinewood, like other British studios, depends on a weak pound to attract U.S. movie makers. But Clement says there are other advantages as well and that the studio’s expertise and facilities are both big attractions. He adds that business is beginning to pick up after a slow first half.

It’s been reported that Rank wants to sell its stake in the Universal Studios park in Florida, which it runs in a 50-50 joint venture with Seagram Co.’s Universal Studios Inc. But about the only way that could happen is for Seagram, the Canadian liquor and entertainment giant, to decide it wants to buy out Rank.

Seagram sources suggest nothing is in the works and that it would be difficult for Rank to get out of the venture. They add that Rank hasn’t even broached the subject, noting that it also is an investor in the new Universal park being built in Japan.

Whether Rank decides to sell any of its other major businesses depends on how the company performs in the second half of the year, when it traditionally makes 70% of its profit.

Teare still has to convince investors that his strategy is working and that he can meet his self-imposed target of 15% return on capital expenditure. Rank may also face the challenge of coping with economic recession.

Recession Could Be a Good Thing

Ironically, Rank could thrive in a recession since many of its businesses could prove more resilient than most. Bingo players are loyal to their hobby whatever the economic conditions. Worries about job losses may make people decide to opt for a cheap holiday at home rather than one abroad. Some sector analysts believe that the public needs escapism during a recession--which would be good news for the movie and video businesses.

The consensus among investors seems to be that Teare has the next six months in which to silence his critics.

It will be a period, however, when he will be looking over his shoulder to see whether there is a predator gaining ground.