In a drama that has moved from the silver screen to real life, four major movie-theater chains have rushed for protection under Chapter 11 of the U.S. Bankruptcy Code in recent months. The filings may be just the beginning for the troubled theater-chain business, analysts say.
The problem is simple: There are just too many movie theaters in America, as any regular visitor to one of the 24-screen “megaplexes” can attest. But other factors — most notably a leaseholder-friendly provision that exhibitors have discovered within the Bankruptcy Code itself — are helping to determine the legal course that the theater chains have chosen.
The cast of characters includes Carmike Cinemas Inc., General Cinema Theaters, and the privately held United Artists Theatre Co. (UA) and Edwards Theatres Circuit Inc. — all of which are seeking Chapter 11 relief. Other large outfits, such as Regal Cinemas Inc. and Loews Cineplex Entertainment Corp., may soon join them. In the standard theater-operating model, these exhibitor chains generally selected sites and then constructed the theaters. The facilities were then sold to real estate investment trusts or other corporate landlords, and leased back by the exhibitors.
More than 350 theaters, comprising 1,888 screens, have been closed since last January. The closures represented 5 percent of America’s theaters and 5 percent of its 36,448 screens. Analysts figure that is still perhaps 5,000 to 7,000 too many. The exhibitors’ bankruptcy proceedings, which in some cases are also now tying up the landlords, could result in more closures.
“There really was no choice; we were plain out of liquidity,” says David Giesler, executive vice president and CFO of Denver-based UA, a 215-outlet chain that recorded $631 million in 1999 revenues, along with a net loss of $127 million. “This industry would have to grow its business as much as 50 percent to meet our added costs per screen, which is next to impossible,” he adds.
The exhibitors, though, have found something of a silver lining in the dark cloud of Chapter 11 bankruptcy proceedings, which have pummeled shareholders and given holders of existing debt less than 100 cents on their dollars. That saving grace is the Bankruptcy Code’s Section 502(b) (6), which in effect allows exhibitors to stop paying rent to landlords of vacated movie houses by setting a formula for sharply limiting damages to the movie-house chains when leases are rejected.
“Given the ability to reject leases under Chapter 11, we can create a new, clean company,” says Giesler. Section 502(b)(6) is designed so that leases on the poorest properties are eliminated, and “you end up with a portfolio that is theoretically all winners, no losers. So you don’t have to absorb the cash-flow losses of an underperformer with the positive cash-flow winnings of a good theater.” Even if current shareholders are unhappy, says Giesler, “the cleanup process makes the company attractive to new equity.”
The current sorry state of the theater-chain business had its origins in the late 1970s, when the industry began dividing older cinemas into two-screen venues and fourplexes. With multiple screens, “a theater could have common facilities like concession stands and rest rooms, share ticket-takers and concession attendants, and minimize empty seats by varying the size of the auditoriums,” explains Andrew Lipman, head of distress debt research at New Yorkbased investment bank ING Barings LLC.