Harris/24″/dt1st/mark2nd
Forget those seductions on the silver screen. For real romancing, watch a movie company woo its lender.
At the moment, United Artists Theatres Co. needs to sweet-talk a bank group led by Bank of America Corp. The U.S. movie-theater operator said this month that it will likely breach some covenants of its $450 million bank credit facility after Aug. 30. To avoid default, UA Theatres is seeking waivers or amendments.
Among the problems: UA Theatres is expected to fall short of operating cash flow requirements set in place just four months ago. Not good. But then, over-optimism has dogged the company since its $680 million leveraged buyout in 1992, when it was ranked the nation’s largest movie theater company.
The LBO plan backed by Merrill Lynch & Co. called for 5 percent to 10 percent annual growth in operating cash flow. That didn’t happen. Then UA Theatres missed its own projection for 1997 operating cash flow which allowed a buyer to scuttle an $850 million deal to buy UA Theatres last year.
Saddled with debt, the company has been overtaken by competitors who built “megaplexes” with 18 to 30 movie screens and stadium-style seating, which are sucking business from older theaters. Now UA Theatres must persuade bankers and bondholders that it is not an aging movie star in decline.
That’s a tough sell. Moody’s Investors Service downgraded UA Theatres’ debt ratings and bank debt by two notches this month, expressing its belief that “a forced restructuring may be forthcoming.” In recent days, United Artists Theatres’ 9.75 percent senior subordinated notes due in 2008 have been quoted at below 45 cents on the dollar.
Two years ago, the prospect of a bankruptcy filing was called “absurd” by Kurt Hall, the chief financial officer who became president and chief executive last year. This week, Hall didn’t return my call.
Bankruptcy court might allow UA Theatres to escape or renegotiate leases for money-losing theaters, but it would be a blow to the company’s proud pedigree not to mention Merrill Lynch, which invested $109 million through an LBO fund.
The theater company was founded in 1926. Matinee idols Mary Pickford and Douglas Fairbanks were among its original shareholders, just as they helped launch the United Artists film company in 1919. (The two UA companies never combined; United Artists Pictures is now owned by Metro-Goldwyn-Mayer Inc.)
Pickford and Fairbanks were tight with their bankers, the Giannini brothers, who ran Bank of Italy before it was renamed Bank of America Corp. in 1930. The bank loaned money to the UA film company and administered the Pickford and Fairbanks estates after their deaths. But that was yesteryear. The bank and the theater company have moved their headquarters out of California. UA Theatres oversees its 24-state operation from an office park in Englewood, Colo., while Bank of America is now based in Charlotte, N.C.
UA Theatres expects to meet its bankers Sept. 8, according to Kevin Kuzio, a high-yield analyst with KDP Investment Advisors Inc. Several analysts predict the company will get short-term waivers, giving it some breathing room for six to nine months. As Bank of America Securities high-yield analysts David Peterson and John Stamler say in a July report: “We are fairly convinced that United has the wherewithal and bank support to make it through 1999. So the key for us becomes what does 2000 hold for the company.”
Who can predict next year’s box-office revenue? In recent years, UA Theatres’ operating cash flow has swung from a 1997 high of $95 million to what analysts project to be $75 million this year because of a rotten first quarter. The analysts are waiting to see UA Theatres execute its plan to sell under-performing theaters. But it’s hard to find buyers.
Theater companies are preoccupied with new construction; leveraged buyout firms are sobered by the poor returns. Warburg, Pincus Ventures LP has been trying to sell Mann Theatres since February.
Hollywood Theaters Inc., another mid-sized chain, was sold at a deep discount this year, paying bondholders 70 cents on the dollar.
UA Theatres almost got lucky in late 1997, when Hicks, Muse, Tate & Furst offered to buy the company for $850 million. But the deal collapsed when UA Theatres fell short of its own cash-flow projections. Rather than accept a lower price, UA Theatres decided to proceed on its own. “Titanic” was still playing in theaters; business looked good. But UA Theatres needed to recapitalize. Nearly $82 million in debt was coming due in 1988, and preferred shares UA had sold in 1992 were accruing 14 percent interest.
UA Theatres refinanced the company with $250 million in high-yield bonds and a $450 million bank credit. Now, with hindsight, Moody’s says that wasn’t sufficiently “prudent;” the rating agency suggests that UA Theatres needs capital contributions from Merrill Lynch. Lots of luck. Merrill Lynch got out of the LBO business in 1993.
Meanwhile, UA Theatres must grapple with the need to upgrade its movie houses, even if it doesn’t build 30-screen palaces. About two-thirds of the company’s screens were built before 1992, which suggests they’re vulnerable to megaplex competition. But UA Theatres can’t spend freely. After its dismal first quarter, the company agreed to amend its bank credit facility with stringent terms.
The company must show Bank of America a cash budget each month. The company is also supposed to boost its operating cash flow to $100 million by year end. That goal looks unattainable to three high-yield analysts, who project $75 million.
Sure, the leash is short. But in show business, the banking relationship can outlast a marriage. Pickford and Fairbanks got a divorce but they both stayed friendly with Bank of America.
Kathryn Harris is a columnist with Bloomberg News.
