(P.33) Cinema Economics - five articles (Feb 2000)

1:- Audiences have a big choice - The Scotsman, 25 February 2000
2:- Cinven snaps up Rank cinema chain - Financial Times, 22 February 2000
3:- Apocalypse Now - America's struggling movie theatres - The Economist, 15 January 2000
4:- Rank brings the curtain down on cinemas - The Scotsman, 22 February 2000
5:- Rank sells Odeon cinema chain to Cinven for £280 million - The Independent, 22 February 2000

1:- Audiences have a big choice

The Scotsman, 25 February 2000

THERE are more screens per person in Edinburgh than anywhere else in the country. Research by Dodona Research, a cinema market monitor, shows Edinburgh movie-goers have a choice of 51 screens throughout the city -which is set to increase by nearly 50 per cent with plans for another 24 screens in two multiplexes.

Earlier this year, a South African company, Ster Century, announced plans to build a 12-screen complex in the Pounds 100 million Ocean Terminal in Leith, and Warner Village has expressed an interest in building a similar complex as part of the Greenside development.

The majority of Edinburgh's movie screens are at the city's three multiplexes - the ABC at Wester Hailes, UCI at Kinnaird Park and Virgin at Fountain Park. The rest are at several smaller cinemas and two city-centre complexes - the ABC in Lothian Road, which has plans to increase its number of screens, and the Odeon in South Clerk Street.

The old-style Dominion offers mainstream movies, while the Filmhouse in Lothian Road, the Cameo in Home Street and the Lumiere cinema inside the new Museum of Scotland provide a wide variety of films, with more independent and arthouse movies.

Cinema admissions across Scotland, which are broken down into television regions, have fallen by nearly 10 per cent during the past three years, from 1.1 million in the Borders in 1997 to 993,000 last year and from 9.9 million in central Scotland to 9.1 million.

However, northern Scotland has seen a small increase from 2.3 million to 2.5 million. Across the UK, Dodona Research found that 139.5 million movie tickets were sold last year, but this boom in movie-going has not been without its casualties, and more than 100 screens across the UK closed last year.

Karsten Grummit, the managing director of Dodona, said: "We expect the high rate of closures to continue. What will be new is that, within two years, we can expect to see some perhaps older and smaller multiplexes joining the list of cinemas closing."
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2:- Cinven snaps up Rank cinema chain for £280m

Financial Times, 22 February 2000

Rank Group yesterday confirmed the sale of its Odeon cinema chain to Cinven, the private equity concern, for £280m. The diversified leisure company will receive £272m net cash after meeting obligations to finish work on three cinemas. Odeon, which was put up for sale in October, had turnover of £128m in the year to December 31 1998. Operating profit was £19m, and net assets were £105m. Market expectations had been for Odeon to fetch more than £300m.

"The price was at the bottom end of expectations and therefore a bit disappointing," said Julian Easthope, leisure analyst at Warburg Dillon Read.

The shares rose 1 1/2p to 160 1/2p.

Odeon is the UK's largest chain with 75 cinemas and 464 screens accounting for 20 per cent of box office sales. Cinven said it planned to merge the business with its 57 ABC cinemas, the sixth largest chain, with a 5.8 per cent market share.

The sale of Odeon is the second significant disposal for Michael Smith, who took over as chief executive in April 1999 with a mission to restore Rank's fortunes. It follows the sale of the nightclubs business to Northern Leisure, the disco operator, in October, for £150m. Mr Smith, who is expected to detail his strategy for reviving the group on Friday when the annual results are due, is committed to reducing debt, which stood at £1.26bn in June 1999.

Rank is also in talks to sell another film-related business, Pinewood Studios, for about £50m. It is negotiating with Michael Grade, who recently stepped down from First Leisure. Other disposals being considered include Deluxe, its film processing and video duplication business valued at £750m. Tom Cobleigh, the pub chain, is also a disposal candidate. Analysts expect Rank to report a fall in profits before exceptionals from £255m to £220m-£240m. Rank's exit from the cinema industry follows that of Virgin, which was the third largest operator last October when it sold its 34 sites to UGC, the French group, for £215m.

The UK cinema industry has had a difficult time over the past few years prompting fears that the multiplex success story may have run its course. However, admissions, which fell from 139.5m to 135.5m over the same period recovered last year to 139.5m, according to Dodona Research, the research consultancy.
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3:- Apocalypse Now - America's struggling movie theatres

The Economist, 15 January 2000

Sometimes big is bad news as the story of the movie-theatre business suggests.

THERE is carnage in America's cinemas these days, and not all of it is on the screen. Having built far more cinemas in recent years than the market can sustain, the big chains of movie theatres are leaking cash and watching their share prices crash through the floor. Rumours are now swirling round the industry that one of the companies is likely to file for Chapter 11. And, just as films appear in Europe some time after they open in America, so the industry's troubles threaten to cross over too.

All good stories have a strong theme running through them. The moral of this one is: beware the notion that big is better. While the business was riding high a couple of years ago, two sorts of big were in vogue in the business: big companies and big theatres.

The ordinary old cinema was superseded during the second half of the 1970s and the 1980s by the multiplex. Then, in the early 1990s, the megaplex arrived. Definitions are flexible, but multiplex tends to mean fewer than 15 screens, and mega more than 15; more importantly, however, mega tends to have 'stadium seating' - arranged on steps, so the hat in front does not obscure your view - and digital sound.

The theatre owners, who had been struggling to find ways to pep up a slow business, were thrilled by the megaplex. They talk in terms of how large an area a cinema can 'clear' - the radius of the area that people will come from to your cinema to see a big hit. Clearance zones have fallen from 15 miles (24 kilometres) in the 1960s to two or three miles now. But the first megaplexes, theatre owners found, were clearing five- mile radiuses. It looked as though cinemas had found their salvation.

In their enthusiasm for building new megaplexes, the theatre owners were egged on by the shopping-mall operators. America's malls were having a hard time, and operators decided that they needed 'anchor' tenants, who would lure the crowds. Movie theatres, everybody decided, were the thing; so the chains were bribed to build.

At the same time, Wall Street got into the theatre business. 'From a strategic financial point of view,' says Marina Jacobson, an analysts at Bear Sterns, 'movie theatres are attractive. They have a huge free cash flow.' Kohlberg Kravis Roberts, a buy-out firm, started acquiring small properties, and then in 1998 devised a plan with Hicks Muse Tate & Furst to put together two of the biggest chains, Regal Cinemas and United Artists, into one vast company. The United Artists deal fell through, but KKR and Hicks Muse jointly bought Regal, stuck it together with other properties, and created a 2,500-screen chain, making it the biggest in the country.

But the buyout boys were not just acquiring a nice set of accounts. There was a grand scheme behind these deals, too. The financial firms reckoned that, by creating a big company, they could reverse the traditional balance of power in movies. Instead of Hollywood screwing a fragmented theatre business, the opposite would happen.

It didn't work out that way. For a start, the megaplex-building went crazy. The first megaplexes, which produced such wonderful figures, were built in the most promising markets. After that, the returns diminished. Yet the building went on, because everybody wanted a megaplex in the biggest markets. 'You've got 30-plexes over the street from 20-plexes,' says Mike Patrick, chief executive of Carmike Cinemas, based in Columbus, Georgia, which is the third-largest chain.

There was a problem with the biggest megaplexes, too. There were not enough movies to fill them. At any one time there are around 14 movies doing business in America. That is enough to fill a multiplex, or a small megaplex if you stick the popular films on a couple of screens. The theory was that foreign films, which have never made much headway in America, would fill the extra screens. It hasn't happened. Mr Patrick thinks it was a silly idea. 'If they didn't like it before, why would they like it now?'

As the number of screens has rocketed, so has the debt that the cinema chains are carrying. Capacity utilisation has fallen, all four of the publicly-quoted chains lost money in their last full recorded year, and their share prices have crashed .

Nor has consolidation shifted the balance of power from Hollywood. Cinemas are paying as much for their movies as they ever were. Of course, an oversupplied market does not offer the best conditions for testing the theory. But Chris Dixon, at Paine Webber, maintains that the buyout firms had misunderstood the nature of the movie market. 'The idea that the balance of power would swing in the exhibitors' favour was nonsense. The exhibitor is always at the mercy of the studio that has just released the latest hit.'

For the industry to start recovering, says Mr Dixon, one of the chains needs to go out of business, and a lot of theatres need to be closed. The first of his wishes looks as though it may come true. The second is beginning to happen, but the process will be a long one.

Are Europe's chains getting themselves into a similar mess? Europeans have been building nearly as fast as over the past few years as the Americans have. But Europe is still building more of the moderate-sized multiplexes, rather than going in for the American-style giants. And most European countries have proportionately fewer screens than America does.

Yet Karsten Grummit, who runs Dodona Research, an industry consultancy, points to some worrying signs - even in Britain, a relatively underscreened country. 'Nobody's losing money there, but things are a lot tougher than they were a couple of years ago.' Capacity utilisation, as measured by tickets sold per screen, is falling , and competing multiplexes are springing up in many cities. Europe's chains need to look over the pond and beware.
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4:- Rank brings the curtain down on cinemas

The Scotsman, 22 February 2000

RANK, the leisure and entertainment group, ended more than half a century's association with the cinema business yesterday, when it wrapped up a deal to sell its Odeon cinema chain to the European private equity firm, Cinven, for Pounds 280 million.

The sale marks the latest stage in Rank's restructuring under Mike Smith, the chief executive, who sold the company's nightclubs and late-night venues business for Pounds 150 million last October. All proceeds would be used to reduce the group's debts of about Pounds 1.3 billion. The sum was slightly below market expectations - industry sources had indicated last month that the deal could be worth Pounds 325 million.

Cinven plans to merge Odeon, the largest UK cinema chain with 20.6 per cent of the market, from 470 screens and 75 UK locations, with its ABC cinemas, currently the sixth largest cinema chain in the UK with 57 sites. The deal makes Odeon 60 per cent larger than its next competitor. Behind Odeon, UCI has 16.5 per cent of the market, followed by UGC, which bought Virgin Cinemas last October, with 14.4 per cent, and Warner Cinemas, 14 per cent.

Richard Segal, the chief executive of Odeon, said Cinven would provide capital to allow Odeon's investment programme to continue. Mr Segal said the two head offices would be merged into one with "negligible" redundancies. More than 95 per cent of the group's employees work in the cinemas themselves and would not be affected by the changes.

Rank is set to report full-year, pre-tax profits on Friday which analysts are forecasting at Pounds 217-243 million, down from Pounds 255 million previously. The Rank empire reached Britain's high streets when the company bought the Odeon Theatre Group in 1941, but the group's links with the wider film industry stretch back further. In 1932, J Arthur Rank, later to become Lord Rank, started producing films to combat what he saw as the "corrupting influence of Hollywood on British souls". Lord Rank took control of Pinewood Studios in 1935. When Rank bought the Odeon Theatre Group, the deal was timed to take advantage of the post-war cinema boom, and by 1950 there were 596 cinemas in the group.

But the arrival of more TV channels, and later video, took its toll on the industry, and by 1981 the Rank group had cut back to owning just over 100 cinemas. However, in the early 1990s cinema-going began to enjoy a recovery, and in 1997 Rank increased its number of screens by 14 per cent and a further 11 per cent in 1998 as it bought up smaller players in the market and moved into the new market for giant out-of-town multiplex cinemas.
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5:- Rank sells Odeon cinema chain to Cinven for £280 million

The Independent, 22 February 2000

RANK, the struggling Butlins-to-Hard Rock Cafe leisure conglomerate, said yesterday that it was exiting the cinema business after almost 60 years with the pounds 280m sale of its Odeon chain to Cinven, the venture capital group.

The UK's biggest cinema estate will be merged with the number six-ranked chain, ABC, which Cinven acquired from Sir Richard Branson's Virgin group in 1996. Dick Munton, a director at Cinven, said: "We plan to extend the lead of the market leader by combining it with ABC." Mr Munton said that Cinven would spend about pounds 60m over the next four years on integrating and developing the business, but added that this "should not be seen as the limit of our investment".

Mr Munton said he was "comfortable" that no competition issues would arise to threaten the deal, even though the enlarged group, which will be branded under the Odeon name, will dominate the UK market with a 26.5 per cent share; about 10 per cent more than UCI, its nearest competitor. He said there was "a near perfect geographical fit" between the 75 Odeon cinema sites, operating a total of 464 screens, and ABC's 57 cinemas, which are spread across the UK. Mr Munton hinted that Cinven could add further to its portfolio of cinemas. He said: "There is still a significant trail of smaller operators that could become available."

The Rank disposal, which marks the end of a 59-year link with the cinema business, follows the earlier pounds 150m sale of the group's chain of bars and nightclubs to Northern Leisure. Rank, which would not comment on yesterday's deal because it is in a closed period pending its annual results presentation on Friday, is undergoing a radical restructuring programme under its chief executive, Mike Smith. Mr Smith was appointed in April last year to shake up the business, and has already announced plans to cut 465 jobs as part of a plan to trim costs by pounds 20m this year.

It is understood Rank is close to selling its Pinewood studios business, bought in 1935, and that a consortium headed by Michael Grade could snap up the business within days. Mr Smith has already made an unsuccessful attempt to sell Rank's Tom Cobleigh chain of pubs.

The proceeds from yesterday's deal will be used to reduce Rank's debts, which currently stand at about pounds 1.3bn. Analysts are forecasting full-year pre-tax profits of about pounds 225m for the group, down from pounds 255m the previous year.

Cinven is believed to have fought off George Soros's Quantum Fund, BC Partners and Clear Channel Communications of the US to clinch the Odeon deal. Rank shares closed up 1.5p at 160.5p yesterday.
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