For Redstone, a financial drama

For Sumner Redstone, the coming attractions at his theaters are not about the movies.

With the sale of his ill-fated stake in video game maker Midway Games Inc. out of the way, Redstone can now focus on attracting interest from buyers for parts of his family’s movie theater circuit to pay down his company’s onerous debt.

Although such a plan has been outlined for his lenders, with whom Redstone’s company, National Amusements Inc., is negotiating to restructure $1.6 billion in debt, the timing for divesting theaters couldn’t be worse.

In normal times there would be several interested buyers for National Amusements’ theaters, which are considered highly attractive assets in the movie exhibition industry. Many are among the top-grossing cinemas in their markets, and they sit on valuable real estate.

But these are far from normal times.

The economy is mired in a recession, consumers are reining in spending and companies are facing difficulty raising capital for acquisitions. Also troubling: The theater business is a mature industry, with attendance levels basically flat for nearly a decade. The only way theaters have been able to keep box office revenues increasing is by hiking ticket prices.

“It’s a tough time to sell, and buyers have modest access to new capital,” said Jeffrey Logsdon, an analyst with BMO Capital Markets.

National Amusements, based in Dedham, Mass., near Boston, operates 1,500 screens around the world, but most are concentrated in New England, the mid-Atlantic states and the Midwest. The company has spent heavily expanding overseas in the United Kingdom, Russia and Latin America, upgrading sites with stadium seating and 3-D projection systems, and introducing “premium” Cinema de Lux theaters where moviegoers can order cocktails with their popcorn.

“It’s a very high-quality circuit that has always been well-managed and well-operated,” said Tim Warner, president of the Dallas-based circuit Cinemark USA.

Determining a value for National Amusements theaters is complicated because, unlike most chains, the firm owns much of the underlying real estate. But with the real estate market in a slump, Redstone would not be able to get full value for the theaters. Redstone says his circuit, the fifth-largest in the U.S., is worth $1 billion. Analysts have pegged it closer to $500 million to $700 million.

Media analysts and exhibitors say that in healthier economic climates, theater chains have sold for five to eight times their cash flow, and that operating cash flow margins at major chains typically run from 15% to 20%. Concession snack sales can account for as much as 25% to 35% of a theater’s revenue.

Major chains such as Regal Entertainment Group, the largest operator of theaters in the U.S., and Cinemark, ranked No. 3, would be logical buyers. But even Regal’s management concedes that as good a fit as the theaters might be with its own locations, acquiring them in today’s market could be difficult for any buyer.

“These are very challenging times, and what creates opportunities for the sellers also creates barriers for buyers because of the very difficult lending environment,” said Mike Campbell, chief executive of Regal Entertainment Group. Cinemark’s Warner declined to comment on whether his company would be a suitor.

Another potential buyer, AMC Entertainment Inc., the nation’s second-largest theater chain, also declined to comment. Last month the company suspended a public stock offering because of the roiling equity markets.

Although various investment bankers have reached out to circuits like Regal to gauge interest, potential buyers haven’t been furnished with any financial figures from National Amusements to evaluate acquisitions, according to some theater operators.

Last month, National Amusements (also the holding company for the publicly traded media companies Viacom Inc. and CBS Corp.) presented its bankers with a plan to sell a portion of its 118 theaters. The Redstones want to retain their core group of theaters in New York, Massachusetts, Connecticut and Rhode Island, as well as their cinemas in Russia.

All the non-New England theaters, including the Bridge in Los Angeles, and those in New York, New Jersey, Ohio, Michigan, Kentucky, Pennsylvania and Iowa, are for sale. Also up for grabs would be National Amusements’ chain in Latin America and its 276-screen U.K. circuit, which industry observers say could fetch hundreds of millions of dollars. A spokeswoman for National Amusements declined to comment.

Redstone and his daughter Shari, who runs National Amusements, have long disagreed about the viability of the theater business. That’s one of several issues, including succession and corporate governance at their closely held family company, that the two have feuded over for more than a year.

Before National Amusements’ debt problems took center stage, the pair had been in talks through their lawyers to sever their business ties. The plan was for Shari Redstone to retain ownership of the circuit in exchange for her 20% stake in National Amusements.

Sumner Redstone has wanted out of the movie theater business for years. Despite inheriting the theater company founded by his father in the 1930s, Redstone has long maintained that exhibition is a non-growth industry.

Shari Redstone, on the other hand, is a big believer in the future of theaters. Ever since she took over the reins of National Amusements in the mid-1990s, she has moved aggressively to upgrade the chain and to expand globally. Many believe that she will ultimately wind up with full ownership of the circuit and will be the one to carry on the family legacy.

Media analyst Logsdon said that the health of the movie theater business is largely driven by the movies that are in release.

“It’s a mature business whose ups and downs are driven by product cycles,” Logsdon said. “If there are good movies, people go.”

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