Business

Trouble at the Megaplex

The passion for big, big theatres threatens to sink the Cineplex Odeon chain

Robert Sheppard January 22 2001
Business

Trouble at the Megaplex

The passion for big, big theatres threatens to sink the Cineplex Odeon chain

Robert Sheppard January 22 2001

Trouble at the Megaplex

Business

The passion for big, big theatres threatens to sink the Cineplex Odeon chain

Robert Sheppard

They are Canada's dubious gift to the cinematic world—the opulent, multi-movie “megaplexes” that have become the new cathedrals of the silver screen. Popular? No question. Moviegoers drive in droves right by their local theatres to luxuriate in the dazzle of the megaplex experience: stadium seating (some offer loveseats) and wraparound screens; cafés and video arcades in the lobbies; personal greeters in certain theatres; hot food and popcorn that runs $4 a bag (concession markups can average 84 per cent in the larger chains).

But it is not just movie lovers who have succumbed to megaplex mania. Supposedly hardheaded business execs—the Bronfmans among them, the money behind Canadas ailing Cineplex Odeon chain—have fallen victim to their allure, to the point where the theatre business in North America now resembles the cod industry in Newfoundland: too many cinemas chasing too few patrons. “The industry is way out of control,” says Christopher Dixon, an analyst with UBS Warburg in New York City, who says that one in five theatres should be closed. The megaplex building boom has created some 37,000 screens in North America to service roughly the same number of people who went to the movies 50 years ago. And, for some, the irony is so rich you could smear it on popcorn.

Take Garth Drabinsky, popcorn lover. A flamboyant impresario of the old school, Drabinsky was the one who cobbled together the Cineplex Odeon chain in the early 1980s—before being unceremoniously ousted in a bitter coup in 1989. His 18-cinema showcase, carved out of the parking arcade in Toronto’s just-opened Eaton Centre in 1979, was the first of the so-called multiplexes—smallish intimate cinemas under the same

roof designed to show nearly new features. His extravagant 18-screen, 6,000-seat colossus on the Universal Studios’ lot in Los Angeles in 1987 was—at a cost of $1 million (U.S.) a screen—the prototype of the megaplex that took flight during the American real estate boom of the mid-1990s.

“But I knew where to build theatres and what to spend on them,” exclaims Drabinsky, from a car phone somewhere in the wilds of Toronto. The cinema on the Universal lot was sold for nearly three times its cost a few years later, Drabinsky recalls. “What’s going on right now”—glitzy, multi-screen megaplexes being built just a few kilometres from each other, driving cinema operators into bankruptcy at a huge clip—“is just crazy,” he says. And what is really crazy: the corporate meltdown is taking place in the midst of the longest box-office boom in Hollywood history.

According to Exhibitor Relations Co. Inc., a Los Angeles firm that tracks the movie box office, the motion-picture industry ended 2000 with a record $11.4 billion in North American ticket sales, its longest streak—nine years—of continuous gains. But Tinseltown’s good news has not trickled down to exhibitors. Six chains in the United States have filed for bankruptcy protection and now one of the largest—New York-based Loews Cineplex Entertainment Corp., the parent since 1998 of Canada’s Cineplex Odeon Corp.—is teetering on the brink, blaming a season of poor summer fare.

With nearly $2.1 billion in liabilities on its books as of Aug. 31, Loews has gone through five debt-rescheduling agreements with its major creditors since the summer and saw its credit rating reduced to junk-bond status by Moody’s Investors Service in December. It now has until Jan. 26 to come up with a plan to satisfy its creditors and major shareholders—giant Sony Corp. and Vivendi Universal.

Loews’ Cineplex Odeon is one of three big chains, all U.S.owned, operating in Canada. Market-leading Famous Players Inc. with 110 theatres hosting 904 screens is still profitable. (“Some people in this business have pneumonia, we have a cold,” says president Robb Chase.) Nonetheless, revenues have dipped. The newest arrival, Kansas City, Mo.based AMC Entertainment Inc., has not shown a profit in two years. But it is convinced its seven new megaplexes— four in suburban Toronto, one in Ottawa and another two almost completed in Montreal and Mississauga, Ont.—will more than pay for themselves in the long run, says vice-pres-

No. of screens COMPANY CANADA UNITED STATES Famous Players 904 Loews Cineplex 851 1,950 AMC Entertainment 122 2,486

ident Rick King. Loews’ Cineplex Odeon, the chain that Drabinsky built for a time into a world beater and that the Charles Bronfman family have invested heavily in (they own roughly 7.5 per cent of Loews and have watched their holdings drop nearly 90 per cent in the last year), is the weak kitten.

This is an odd business. Look at the balance sheets of theatre operators and, for the most part, revenues are increasing—the product of higher ticket prices (up to $12 these days) and fancier foods at the concession stand—even as attendance, at least in the United States, is falling off. But profits are being dragged down by megaplex spending, long leases on smaller theatres that almost no one goes to anymore, and overly enthusiastic expectations. At Cineplex Odeon, the problem is deep. In the six months ending Aug. 31, it lost $9 million, a drop in the bucket compared to the $130 million in red ink at the parent. More ominously, overall revenues in the Canadian operation dropped 20 per cent from the previous year.

A month ago, Cineplex Odeon chairman Allen Karp acknowledged “the industry is writhing.” But through an associate he told Macleans that the timing is too sensitive at the moment to discuss the situation. Rumours abound. Will takeover specialist Gerry Schwartz make a bid? (He owns a small chain already.) Will Cineplex Odeon be pushed into insolvency? (Loews’ latest filing with U.S. regulatory officials says that if the Canadian operation goes under that will not affect the parent’s credit agreements.) The only certainty: neither Famous Players nor AMC is looking to take over its rival. “We’ve had some ‘what if’ conversations,” says AMC’s King. “But nothing you would call actual negotiations.”

The most likely solution, says UBS Warburg’s Dixon, is that the venerable Loews, built by an impresario who created a chain of nickelodeons in 1904, will try to refinance itself by a shareholder infusion or by convincing its lenders to swap debt for ownership, and soldier on. This is, after all, a business built on celluloid and dreams, and the mighty megaplex is no exception. When AMC sparked this latest round of mega-building in 1995 with its 24-screen complex in Dallas, other investors looked on and saw that, with the economies of scale, operators could turn a profit with little more than 20-per-cent occupancy. Whoa. Sugarplums. What they didn’t fully appreciate was that everyone and her brother would build one on the very next corner. ED