With every acquisition comes a pothole or sinkhole. When Vivendi SA acquires Seagram Co. Ltd., it may find the latter in the North American movie-theater business.

Theaters are a small thing, compared with the glitter of Seagram's Universal Studios and its giant recorded music business. But Universal owns 25.5 percent of Loews Cineplex Entertainment Corp., a heavily indebted theater operator that warned last month that it will need a break from its bank covenants and perhaps an equity infusion.

Will Universal dig into its pocket, again? By my count, the various owners of Universal have pumped money into the theater chain three times since it made the initial $170 million investment in Cineplex Odeon Corp., a predecessor company, in 1986.

Driven to the edge of insolvency by a 1980s' building-and-buying spree, Cineplex needed help from its big investors in the early 1990s, even though it shed assets and curbed its spending.

Universal undoubtedly hoped the Cineplex problem was solved by a 1998 merger with Loews Theatres, a stronger chain owned by Sony Corp. But since then, Loews Cineplex stock has lost 90 percent of its market value. It's been trading at $2 or less since Aug. 25, when Loews said it might seek more equity and a renegotiated deal with its bankers.

Experience won't help

Vivendi, of course, is acquainted with the movie-theater business. The giant French company owns nearly 40 percent of UCG, a leading European cinema company that recently acquired British and Irish theaters from Virgin Entertainment Group.

But Europe is a healthier market. There are fewer theaters competing for movie-goers.

The United States has a glut of theaters. From 1990 to 1998, the number of screens increased more than 10,000, or 46 percent, while admissions rose only 25 percent.

The building frenzy has quickened, with about 5,200 screens added or under construction since 1998, according to analysts at ING Barings, who project a total of 39,400 screens by year's end. Quoting unnamed industry denizens, the analysts say nearly one-third of the screens need to be closed if the industry is to "sustain profitability."

At the moment, most movie-theater companies are just trying to stay solvent. Five companies have voluntarily filed for bankruptcy protection in 13 months, including No. 2-ranked Carmike Cinemas Inc. and No. 6 United Artists Theatre Co.

Bankruptcy has its pluses: It's one way to reject leases that movie-theater companies no longer want. But it's certainly not fun for landlords, bondholders or equity investors. In addition to losing most, if not all of their money, it can sully investors' reputations.


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