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.

Merrill Lynch & Co. invested $109 million in United Artists, when it backed a leveraged buyout in 1992. At the time, United Artists ranked No. 1 in screens.

Leveraged buyout companies Kohlberg Kravis Roberts & Co. and Hicks, Muse, Tate & Furst Inc. have invested $500 million each in No. 1-ranked Regal Cinemas Inc. In a new report, ING Barings analysts Andrew Lipman and Sanjay Nayar say it is "extremely likely" that Regal will seek bankruptcy protection by the end of the month.

Exiting the losing theater business can be difficult. Warner Bros. and Paramount Pictures sold their jointly owned Cineamerica Theatres in late 1997, only to buy most of the theaters back out of bankruptcy court this year. Why? Their names were still on many theater leases.

Loews Corp. boss Laurence Tisch sold his theaters in 1985 to a buyout group and by 1989 they were in Sony's hands. Because leases often run for 25 years, speculation is rife about just who might be on the hook for some of the Loews theaters.

Is the Tisch signature still on some theater leases? "If there is anything left that we had signed, it would be de minimus," says Tisch, 77.

Big names

Prior to its merger with Loews, the Cineplex Odeon chain had a short but colorful history. Founded in 1979 by Garth Drabinsky, a Toronto lawyer-turned-showman, the company boldly struck deals to build plush theaters in shopping malls.

Drabinsky's moxie drew some big-name investors, including a group led by Charles R. Bronfman, co-chairman of Seagram Co. Ltd., in 1983. The Bronfman group acquired a 30 percent stake, and even loaned money to Drabinsky in 1988 to buy more shares.

MCA Inc., as Universal Studios was formerly called, acquired its 49 percent Cineplex stake in 1986.

Through an aggressive acquisition and construction campaign, Cineplex became the second-largest theater chain in North America by 1988, but it was bowed by more than $600 million in debt and public questions about its accounting practices. Drabinsky was fired in 1989; MCA and the Bronfman group had to prop up the company the next year with $100 million to satisfy bankers.

In 1996, after Seagram purchased MCA, the company and Charles Rosner Bronfman Trust together paid $50 million to maintain their stakes in Cineplex when the theater company sold $35 million in new shares to the public. With Cineplex seemingly on the mend, it became a merger partner for Loews Theaters, after the renamed Universal Studios agreed to pay $85 million to buy shares in Loews Cineplex.

The merger allowed Sony to reduce its stake to 39.5 percent. The Charles Bronfman group holds about 7 percent.

No one in Hollywood detects any desire on Sony's or Universal's part to spend more on Loews Cineplex. Calls to Sony, Universal and Loews failed to elicit answers.

But if Sony or Universal put its name on any leases, "they're in the same trap that Warner and Paramount are," warns one theater executive.

Vivendi, take note: Once you're mired in the North American theater business, it's hard to escape.

For reprint and licensing requests for this article, CLICK HERE.