General Cinema More Wall St. Than Hollywood : Investments Pay Off Handsomely for Bottler and Theater-Chain Operator

The limousine startled onlookers when it drove past Bloomingdale’s and halted at the corporate offices of General Cinema, tucked here in a suburban shopping mall.

General Cinema is a $1-billion company, but prides itself on a certain corporate austerity, epitomized by its plain headquarters and company station wagon.

On that day in 1982, the limousine in question was delivering a subpoena on behalf of Heublein, a $2-billion conglomerate resisting the smaller company’s acquisition of 19% of Heublein’s stock. General Cinema executives were amused as they watched the Heublein vehicle maneuver tentatively around their unpretentious building.

Throughout the fight, General Cinema said it only wanted to be a helpful investor, but Heublein soon fled into the arms of R. J. Reynolds. For its original investment of $160 million, General Cinema now holds Reynolds stock worth about $280 million, and collects annual dividends worth nearly $20 million in pretax dollars.

General Cinema has been making quite a reputation--and financial killing--on its investments in other companies in the past few years. In each instance, the New England company has insisted that the investments stem only from a desire to find a third operating business to add to its theater chain and its soft-drink bottling operations.

Over the past two decades, General Cinema has become the nation’s largest motion picture exhibitor, and the largest independent bottler of Pepsi-Cola products, thanks largely to skillful managing by the founder’s son and chief executive, Richard A. Smith. The failure to find a third consumer products business has been frustrating, but General Cinema executives clearly relish the dividends and attention they’re receiving from investment bankers in the interim.

“We get early looks at things. I’m sure that’s why Carter Hawley Hale came to us,” says J. Atwood Ives, General Cinema’s vice chairman and chief financial officer, alluding to the company’s decision last year to invest $300 million in the Los Angeles-based department store retailer while Carter Hawley was fighting an unwelcome takeover bid from The Limited.

Ives said he initially shrugged off the overture, until Carter Hawley’s bankers offered General Cinema the option of buying its Waldenbooks division.

Although General Cinema eventually decided not to buy the book store division, it professes satisfaction with the investment in Carter Hawley’s preferred stock, which would equal 39% of Carter Hawley’s common stock if converted, and will pay dividends of $30 million in pretax dollars this year.

As in the case of the Reynolds investment, the Carter Hawley dividends are 85%-free of ordinary income taxation, because General Cinema made the investments prior to a change in federal tax laws last year.

Some Embarrassments

These recent investment coups have masked some embarrassments for the image-conscious company.

A federal grand jury recently sought, and received, documents from General Cinema in an ongoing criminal investigation of film-buying practices in South Bend, Ind., for possible antitrust violations, according to a disclosure made to the Securities and Exchange Commission in April.

At issue is “product-splitting,” or some exhibitors’ illegal practice of agreeing among themselves which motion picture titles they’ll seek from motion picture distributors, thereby reducing competition in a given geographic area.

General Cinema says it has had a staunch company policy forbidding the practice since 1977, and told the SEC in April that it would cooperate fully with the Justice Department and conduct its own “system-wide internal investigation” to assure compliance.

Last week, however, company spokeswoman Janine Dusossoit declined to comment on widespread industry reports that General Cinema has “cut loose” several Midwestern employees in its theater division and placed an operating officer, head film buyer Charles Viane, on administrative leave.

Viane, reached last Sunday at his Massachusetts home, said it is his understanding that he is on administrative leave but declined further comment.

One attorney familiar with the probe says the Justice Department is launching investigations in “numerous cities” besides South Bend, and is also in the process of interviewing a number of General Cinema’s film buyers.

Company in Turmoil

“Their entire theater company is in turmoil,” the attorney says, “But if I were other exhibitors, I think I’d be worried more.”

The investigation is bound to be painful for a company that prides itself on strong controls, although it uncovered a scandal of a different sort in its bottling division six years ago. In June, 1979, General Cinema accused Herbert G. Paige, the long-time president of the division, of siphoning $5.9 million in commissions from a supplier.

General Cinema has since recovered the sum from the supplier, and has won a civil court judgment against Paige, although no sums have yet been recovered from the former executive. Paige was released earlier this year from federal custody, after serving a prison term on mail fraud charges.

In an April interview, General Cinema’s Smith called the Paige incident “very traumatic,” but said no procedural changes were made as a result. “The problem in that instance was that a high officer--president of a division and member of our board who was in a position to override lower people and control people because they reported to him--decided to for God knows what reason to participate in something that wasn’t right,” Smith said. “There’s no control system in the world that can be foolproof against human override by a senior official.”

General Cinema’s trials-and-errors in corporate strategy have not been nearly so traumatic.

No regrets have been voiced publicly, for example, about the $300-million gamble on Carter Hawley Hale, even though General Cinema eventually decided that Waldenbooks was ill-suited for its plans.

Didn’t Like Locations

Ives, the chief financial officer, says General Cinema had hoped to add computer tapes and other entertainment or informational software to the Waldenbooks inventory, but discovered that the stores were too small and awkwardly located.

“The Waldenbooks stores were in regional malls, but quite often they were on the second floor or off in the corner. They weren’t in the high traffic area, and they weren’t where people could drive up, leave the car running, turn a tape in or a pick up a tape and be on their way,” he says.

Still, the company paid nothing for the option, and received $5 million to stand aside when another buyer (K-mart) materialized.

“On the downside, we made a 13% fixed-income investment in Carter Hawley Hale preferred (stock),” Ives says, reasoning that in a worst-case scenario, “the value of all the pieces (was) clearly worth a lot more than the whole so . . . we could get paid back the principal amount of our preferred stock . . . out of a break-up of the company.”

Ives won’t say whether General Cinema harbors any desire to increase its stake in Carter Hawley, after a seven-year standstill agreement lapses.

“Our position is to work with their management group to try to make that company a better company and to be involved in the strategic longer term, capital financial strategy decisions,” he says. “We’re not merchants; we’re not going to tell them that hot pink is in for junior misses this year.”

Board Representation

General Cinema has seven representatives on the 22-member board of the giant retailing company, but Carter Hawley Chairman and Chief Executive Philip M. Hawley says he does not find their presence “uncomfortable at all.”

Hawley says that outside of board meetings, he has only seen top General Cinema executives once or twice in the past year. “They’re very good participants at the board level but beyond that . . . they haven’t attempted to play a role,” he says.

Three months ago, General Cinema quietly ended a 16-year venture in the furniture retail business, with the sale of its last three Alperts stores. General Cinema had once harbored ambitions of becoming a major operator of furniture warehouse showrooms, second only to Levitz Furniture, but that “bubble burst,” according to Ives.

General Cinema consolidated Alperts’ earnings on its balance sheet for the past three years “to take advance of the tax-loss carry forward,” Ives says.

In May, General Cinema said it would receive a modest profit from the cash sale of the last three stores, but the amount was not disclosed.

A more-publicized flop for General Cinema was its four-year effort to produce motion pictures in the 1970s. In 1979, the company was rebuffed by Columbia Pictures Industries when it offered to buy 20% of that motion picture company, and later that same year, General Cinema gave up on its other film financing ventures, taking a write-down of nearly $5 million.

Worried About Scarcity

Smith says a scarcity of motion pictures prompted General Cinema’s investment at the time. “I was really scared that we’d get to the point where we had 1,000 theaters and nothing to put in them,” the 60-year-old executive says now.

Today, General Cinema operates 1,134 theater screens across the country, up from 582 a decade ago. Motion picture production has soared, assuring a generous supply of product, and General Cinema has joined other exhibitors in a race to add even more screens. Some industry pundits fear that the industry is expanding too rapidly, and predict a painful shakeout for both movie-makers and exhibitors.

But Emanuel Goldman, an analyst with Montgomery Securities in San Francisco, calls General Cinema’s theater expansion plan “low-risk,” because he finds the company “adding on to proven communities. They’re not interested in new neighborhoods.”

Smith challenges those who contend that a surplus of films might be flooding the market, because “reality is that the home video market and the cable markets require even more films than the theatrical market to meet their requirements.”

What’s more, Smith appears willing to plunge once again into film-making, if General Cinema controls its own marketing and distribution this time. “I . . . have been close to the picture business for a great many years; I think it’s got a great future, and I would simply look at it as as economic opportunity,” Smith says.

Sources in the entertainment and financial communities say they believe General Cinema held talks this spring with MGM/UA Entertainment Co. about buying all or part of that Culver City-based motion picture company. Smith and other General Cinema executives have steadily refused comment, although Smith did say he had no interest at that time in investing in a smaller studio such as Orion Pictures or Tri-Star Pictures.

Competitors Bemused

Some competitors are bemused by General Cinema’s apparent willingness to invest in a large studio, because of its aloof manner in show-biz affairs.

Sumner Redstone, president and chief operating officer of another New England theater circuit, says, “Dick Smith is a superb manager. In my opinion, he’s done an excellent job in the building of that company and in its diversification, particularly in the soft-drink business. But from my perception, he does not involve himself in the warm and sometimes exciting affairs of the motion picture industry.”

Another exhibitor, who asks not to be identified, says he finds Smith more interested in Wall Street than Hollywood. “He loves seeing his rankings,” the exhibitor says, with an apparent reference to Fortune magazine’s annual survey of the 500 largest U.S. industrial corporations. (Last year, General Cinema measured 324th largest in sales, but 73rd highest in total return to investors for the year, and 16th highest for its average return over the previous decade.)

The second exhibitor also believes General Cinema is anxious to try its movie-making hand again. In the exhibition business, he says, “You still are dealing with entrepreneurs who have big egos. . . . They all have the itch to show they can be creative too.”

Although General Cinema’s stock has traded publicly for nearly a quarter of a century, the Smith family retains a firm grip on its affairs, with nearly 30% in family hands. Smith, now 60, has run the company since the 1961 death of his father, and he has encouraged his own son, Robert, to join the company upon graduation from Harvard Business School this year.

Founded in 1922

Philip Smith, a one-time Pathe film salesman, started the company in 1922 with the acquisition of the 3,000-plus seat National Theatre in Boston, gradually buying more theaters in smaller New England communities.

He “probably had about 25 units by the time the Depression hit him hard, and he had to divest them piecemeal in the early ‘30s, ending up with three units by 1933,” Richard Smith says. Those three theaters kept the company--and family--afloat, according to Smith, until his father took a gamble on opening drive-in theaters in Cleveland and Detroit.

“He wasn’t the first to test the concept of whether or not pictures could be shown outdoors,” Smith says, but “I believe my father was the first to commercially operate something successful. He invented the idea of having children come in free and of providing playgrounds to try to make it a family experience.”

His father owned 9 of the 15 drive-in theaters operating in the United States at the outbreak of World War II, and was well-positioned for the drive-in boom that occurred after the war, according to Smith, who joined the company after graduating from Harvard University in 1946.

By the time the industry peaked in the early 1960s, Smith’s “Midwest Drive-In Theatres” boasted more than 50 drive-ins.

Regional shopping centers helped displace the local drive-in, but Smith says his father was one of the first exhibitors to spot the shopping mall’s potential as a movie-going site. Around 1947, the elder Smith committed the company to building a theater in a Framingham, Mass., shopping mall, which Smith believes to have been the first of its kind.

Changed Name Twice

In 1960, the company made its first public stock offering, and changed its name to General Drive-In Corp. The name changed again to General Cinema in 1964, to reflect the company’s aggressive march on indoor, suburban mall theaters across the country.

Although some regional operators followed General Cinema into the malls, no competitor materialized on a national scale until the 1970s, with companies such as United Artists Theatre Circuit and AMC Entertainment.

General Cinema prospered in the 1960s largely because of the antitrust strictures placed on older theater chains after World War II, Smith says.

“The consent decrees that broke up the old film companies made it very, very difficult for the remaining theater divisions of ABC Paramount and Loew’s Theatres and so forth to expand at that time.

They had to go to the government every time they wanted to do a single deal. And they had a lot to protect. They had a vested interest in downtowns. So that we, as a free- spirit and entrepreneurial company, could feel free to enter any market,” Smith says.

He describes that era as an exciting time because “We were opening up markets in the ‘60s that hadn’t seen a new theater in maybe 30 or 40 years.” The General Cinema chairman also notes that his company built the nation’s first multiscreen theater.

“In 1961, we opened a couple of twin theaters, and that was really where it all started. That was our concept. I think Peabody, Mass., was the first, and then we did some in Texas shortly thereafter.”

Leased Theater Sites

Throughout the 1960s and 1970s, General Cinema pursued its strategy of signing long-term leases in shopping malls, rather than buying real estate for its new theaters. The company’s rapid growth “would not have been possible if we had to leave our money in the brick and mortar everywhere we went,” Smith says now.

It is possible, he concedes, that the company could suffer from its obligations on its typical 20-year leases if the exhibition business suddenly contracted, but he reiterates a belief that “the current supply of film is barely adequate . . . to meet the needs of all the channels of distribution that the film companies have available to them.”

Just as General Cinema continues to add new theaters, it also shops for new soft-drink bottling franchises.

Last year it acquired another Pepsi-Cola franchise in Fort Meyers, Fla., but the company’s management is increasingly reluctant to pay 18 to 20 times earnings for bottling plants. As Ives recalls, the company paid only six and seven times earnings for many of the franchises acquired in the late 1960s and early 1970s.

“There seem to be more people who are willing to overpay for things,” Ives says, explaining that he and his colleagues have found a similar problem with potential acquisitions in broadcasting, cable and even baked goods.

Ives counseled General Cinema as an investment banker before joining the company in 1974. At 49, he would appear to be a contender for Smith’s job, if the chairman and chief executive retires as he says he will do by the age of 65.

The two other likely candidates are General Cinema President and Chief Operating Officer Robert J. Tarr Jr., who is 41, and Samuel Frankenheim, the company’s 52-year-old chief legal officer.

“I don’t perceive it as a fight. I think we all have different aspirations and different levels of expertise,” Ives says, declining to discuss his own ambitions. “We’re all having fun,” he says.

Smith says he set a tentative retirement date because he believes in “upward mobility for executives. I think if you don’t offer them upward mobility, a lot of their motivation is reduced or destroyed.” But he adds, “I have a very large family investment in the company. I can’t conceive as long as I’m breathing that I’m going to be exactly out of it.”

GENERAL CINEMA 1984 Revenues: $916 million HOW THEY BREAK DOWN Beverages: Nations Largest independent soft drink bottler 56% Theaters: Nations’s largest independent film exhibitor 39% Other 5% OTHER INVESTMENTS 1968 - Invests in a furniture warehouse retailing operation; sells remaining units in 1985.

1968 - Invests in WCIX-TV, Miami, as part of plan to build a broadcast division. Later swaps Miami station for $70 million and WGRZ-TV in Buffalo.

1975 - Makes first of several investments in film production; later makes an unsuccessful attempt to buy 20% of Columbia Pictures. In 1979, ceases making film investments and takes a write-down.

1977 - Becomes supplier of new Sunkist softdrink concentrate; sells business in 1984 to R.J. Reynolds.

1982 - Buys almost 19% of Heublein. Shares are converted to those of R.J. Reynolds after that company buys Heublein.

1984 - Buys $300 million of Carter Hawley Hale preferred stock.