BUSINESS

SHOWDOWN AT CINEPLEX

GARTH DRABINSKY IS LOCKED IN A HEATED BATTLE TO REGAIN CONTROL OF THE COMPANY THAT HE CREATED

JOHN DeMONT May 8 1989
BUSINESS

SHOWDOWN AT CINEPLEX

GARTH DRABINSKY IS LOCKED IN A HEATED BATTLE TO REGAIN CONTROL OF THE COMPANY THAT HE CREATED

JOHN DeMONT May 8 1989

SHOWDOWN AT CINEPLEX

BUSINESS

GARTH DRABINSKY IS LOCKED IN A HEATED BATTLE TO REGAIN CONTROL OF THE COMPANY THAT HE CREATED

The guest list was striking testimony to his influence in the glittering world of Hollywood. Shirley MacLaine, Paul Newman and Steven Spielberg were among show business celebrities who accepted invitations to see Garth Drabinsky, the chairman of Toronto-based Cineplex Odeon Corp.—North America’s secondlargest movie theatre chain—receive B’nai Brith International’s Distinguished Service Award on May 7 at New York City’s posh Hotel Pierre. But even in that atmosphere of adulation there was bound to be an element of tension. One of the event’s scheduled co-chairmen was Sidney Sheinberg, president of U.S. entertainment giant MCA Inc.—Cineplex’s biggest shareholder. But last week, Sheinberg’s office said that he had decided not to attend the ceremony. MCA, in fact, is embroiled in a vigorous fight over Drabinsky’s ambitious plan to regain control of Cineplex, the company that he founded.

The feud between MCA and Cineplex was building last week into a tense drama. The angry rift surfaced on April 8, when Drabinsky, Cineplex vice-chairman Myron Gottlieb and a group of their backers tried to take effective control of Cineplex by privately buying a 30per-cent shareholding from a consortium led by Cineplex’s second-largest shareholder, Montreal businessman Charles Bronfman, to go with the Drabinsky group’s own nine-per-cent stake. By increasing their total Cineplex holdings to 39 per cent, Drabinsky and his group would have a larger controlling interest than MCA, which owns half of the company’s common shares but has slightly less than 33 per cent of the voting shares, in accordance with Canadian restrictions on foreign ownership.

But last week, the Quebec Securities Commission dealt a severe blow to Drabinsky’s ambitious takeover strategy by ruling that his group’s ambitious offer to buy Bronfman’s holdings privately—without making an offer to all shareholders—broke provincial securities law. Then MCA threatened to sue Drabinsky, Gottlieb and five other members of the Cineplex board. But following a crucial Toronto board meeting last Thursday, they agreed to drop the actions. And at week’s end, Drabinsky and his allies were trying to put together a multimillion-dollar proposal to buy out both

MCA and the Bronfman group, as well as the other Cineplex shares they do not already own. Said Ronald Rolls, a lawyer representing Drabinsky: “All sides are considering their positions at the moment.”

Analysts said that the Montreal group is anxious to sell its shares, which have fluctuated sharply over the past two years, falling from a high of $19.37 to a low of $9.62 and closing at $16.75 last Friday. According to court documents, both MCA and the Bronfman consortium have apparently grown concerned about Cine-

plex management. Moreover, Cineplex has recently faced severe criticism from a U.S. accounting firm over its accounting methods. But analysts said that the Bronfman group is reluctant to simply dump its slock on the open market because such a move would send prices down further. They added that Bronfman and his supporters could have another option if a new offer for the shares does not materialize. In that case, they said, Bronfman could join forces with MCA, and they could effectively force Drabinsky out of the company in order to maintain the value of their shares.

For their parts, both Drabinsky and Gottlieb declined to respond to Maclean ’srequests for an interview.

But whatever happened, Drabinsky appeared to be in for one of the toughest fights of his controversial career. After he launched his chain of movie theatres in 1979 in Toronto, rapid expansion pushed his company to the brink of bankruptcy only three years later. But he battled back—largely with the help of an infusion of money from Cemp Investments Ltd., controlled by Charles Bronfman. Drabinsky has built an empire of futuristic movie theatres with a total of 1,825 screens across North America— second only to New York City-based United Artists Theatre Circuit with 2,670 screens— and Britain.

Drabinsky’s big breakthrough came in the spring of 1986 when MCA paid $219 million for 50 per cent of Cineplex. The arrangement was

mutually profitable. Patrick Slattery, a Toronto analyst with the brokerage firm Maison Placements Canada Inc., said that MCA, which owns the Universal Pictures movie studio in Hollywood, received assured access to Cineplex’s theatre screens in the important U.S. markets. And Drabinsky, in turn, used MCA’s financial backing to help fund his aggressive expansion plan into state-of-the-art, multiscreen movie theatres, which pushed his company to the forefront of the movie theatre business. But Drabinsky’s rapid growth carried a steep price tag: the company’s long-term debt had ballooned to $816 million by the end of last year, against assets of $1.5 billion and a profit of $49.7 million.

That debt may be at the heart of Drabinsky’s current battle with MCA. Sensing that the company could have trouble servicing the huge debt load, stock market speculators known as short sellers have been showing a growing interest in Cineplex shares for the past year. Their tactic is to borrow shares from stock brokers, then sell the shares on the market. They hope to repurchase them at a lower price than they originally paid, thereby earning a solid profit. Last week, some short sellers, who ref” 'ed to be named, told Maclean ’s they were speculating that the Drabinsky group—which

includes Toronto real estate developers Rudolph Bratty and John Daniels, investor Andrew Sarlos and secretive investment dealer Gordon Capital Inc.—would not be able to put together an offer for all of the shares, which would push Cineplex share prices even lower.

Drabinsky has cut Cineplex’s debt by selling off assets. But this may also have helped sour Drabinsky’s relations with MCA. Initially, that partnership was a co-operative one—Drabinsky was even touted as a possible heir to the scrappy Sheinberg as MCA’s president. But documents filed with the Supreme Court of Ontario in Toronto show that the relationship between the two men became strained, particularly after March 22 when Cineplex announced it was selling its 50-per-cent interest in Universial Studios Florida—an amusement park in Orlando scheduled to open in 1990, which Cineplex had built with MCA. Cineplex sold it to London-based Rank Organization PLC—a hotel and entertainment consortium— for $180 million. Cineplex said that it wanted to use the proceeds from the sale to reduce debt. In an Ontario affidavit filed on April 20 during an earlier injunction against Drabinsky’s move on MCA, MCA vice-president Charles Paul stated that the MCAand Bronfman-nominated members of the Cineplex board of directors had criticized Cineplex’s financial reporting practices on several occasions. Said Paul: “It was apparent that the two largest shareholders of

Cineplex were entertaining very serious questions as to the quality of management that was being provided by Cineplex.”

As Drabinsky planned his next move last week, he also faced a barrage of criticism from Kellogg Associates, an independent Los Angeles-based accounting firm, which issued a strongly worded three-page report stating that Cineplex’s accounting was the “most aggressive [it] had encountered” and questioned its conclusions. Kellogg investigates the validity of earnings reported by companies in order to provide its subscribers with early indications that a company’s profitability could decline. The firm, which based its Cineplex findings only on corporate documents filed with securities regulators in the United States, concluded that Cineplex’s 1988 financial statements contain “incorrect reporting.” And it speculated that the company’s financial reporting could spark an investigation by U.S. securities regulators and lawsuits by Cineplex investors. David Taylor, a partner with Cineplex’s auditor Thorne Ernst & Whinney of Toronto, said that the company “strongly stands behind its opinion” and sees no reason to change or qualify its approval of Cineplex’s financial statements. Still, for Drabinsky, the tussle with Kellogg was clearly just a diversion from his main challenge—putting together a deal for control of the company that he founded.

JOHN DeMONT

JOHN DALY