Private equity firms bet it’s showtime for theaters

As Hollywood gears up for an expected blockbuster summer season, two of the biggest movie theater chains are offering a rare double feature: themselves.

In an initial public offering last week, exhibitor Cinemark Holdings Inc. sold shares worth $532 million. AMC Entertainment Inc. plans to launch an even bigger IPO this week, estimated at as much as $789 million. Both are owned by private equity investors aiming to take advantage of favorable market and industry conditions to lock in some healthy returns.

The stock offerings are timed as studio movie pipelines are loaded with franchise titles including Friday’s “Spider-Man 3.” Coming soon after are such expected blockbusters as “Shrek the Third,” “Pirates of the Caribbean: At World’s End” and “Harry Potter and the Order of the Phoenix.”

The IPOs also signal renewed investor appetite for an industry that for decades has weathered doomsday predictions. Even today, cinemas face a new round of long-term skepticism with the proliferation of high-definition TV, video games, high-speed Internet and the quick release of DVDs.

Longer term, analysts expect digital 3-D and other innovative programming to help theaters attract crowds.

“Yes, there are a ton of other things people can do with their time, but this will be a viable industry for a long time,” said Karen Berckmann, an analyst with Moody’s Investors Service. “People will want to sit in a theater and watch a movie on the big screen with other people no matter how good their home entertainment systems get.”

The two IPOs come on the heels of theater advertising network National CineMedia Inc., which went public in February and has seen its shares surge more than 20%. The industry’s bellwether Regal Entertainment Group, the nation’s largest movie theater chain, went public in 2002 and has been generating steady profit.

“The financial community’s strong interest reflects confidence in the long-term growth of the theater business,” said John Fithian, president of the National Assn. of Theatre Owners. “In the short term it’s always cyclical, but in the long run this is a growth industry.”

Some cautious analysts say the latest IPOs could turn out better for the well-heeled private equity investors cashing in than for average investors. Cinemark and AMC, they note, lost money last year even as movie ticket sales bounced back from the box-office slump of 2005, when attendance slid for the third straight year.

And both companies face heavy debt loads as they seek to grow while avoiding the errors of the late 1990s, when rapid theater overbuilding led to a string of bankruptcies in 2000 and 2001. Cinemark bought Century Theaters and AMC bought the Loews chain last year as they stepped up their efforts to compete with Knoxville, Tenn.-based Regal.

“This was a window that was viewed upon by the IPO underwriting community as an opportunity to get these deals done,” said David Menlow, president of IPOFinancial.com, a website that analyzes new offerings. “It’s a choreographed situation.”

Cinemark insiders -- led by an affiliate of private equity firm Madison Dearborn Partners, which bought the company three years ago -- more than doubled its investment with an IPO priced last week at $19 a share. That price was at the upper end of the range anticipated by underwriters Lehman Bros., Credit Suisse, Merrill Lynch & Co. and Morgan Stanley.

But the stock market’s early reviews on Plano, Texas-based Cinemark were mixed: The shares slumped below the offering price on their first trading day Tuesday, then later in the week recovered to post gains.

Awash with billions of dollars in capital, private equity firms have been snapping up, retooling and then reselling a variety of companies in recent years, increasingly through IPOs.

The initial drop in Cinemark shares showed that some investors have grown wary of the trend, Menlow said.

“The message to the market is, ‘Give us money, give us your confidence and we’ll repay it with good numbers in the future,’ ” he said. “There is a concern that insiders are using the investing public as a tool for their own benefit.”

AMC, the nation’s second-biggest theater chain, was previously public before it was taken private less than three years ago by a group headed by JPMorgan Partners and Apollo Management.

Menlow said Kansas City, Mo.-based AMC could face a chilly stock market reception if the deal was priced aggressively, like Cinemark’s. But he said it could fare better if the sellers and underwriters “extend an olive branch to the public” with a lower sale price, theoretically allowing for more upside in subsequent trading.

The IPO, expected today, could fetch $18 to $20 a share, according to Goldman, Sachs & Co. and other Wall Street underwriters.

Moody’s Berckmann said the theater business still carried risks because of the steep costs associated with real estate and other expenses, along with the cyclical nature of the film business.

But she said the chains appear to have learned lessons from the industry bankruptcies earlier in the decade. They are being “much more rational” than they were in the 1990s when building multiplexes, for example, focusing on areas with older facilities.

Robert Bucksbaum, who owns the independent Majestic Crest theater in Westwood as well as box-office tracking firm Exhibitor Relations Co., said the biggest long-term threat to the industry might be the shrinking “window” between the release of movies in theaters and on DVD, now about three months.

“This summer the box office is going to be through the stratosphere,” Bucksbaum said. “Hopefully we can sustain this.”

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josh.friedman@latimes.com