Rescues Film Company, Gets Package of Securities : Warner Invests $75 Million in Cannon Group

Hollywood film maker Cannon Group was rescued from a financial crisis Tuesday by entertainment conglomerate Warner Communications.

Under the complex arrangement, Warner agreed to give Cannon $75 million for securities convertible into 23% of Cannon’s common stock, plus an option to buy 50% of Cannon’s 525-screen chain of European theaters.

New York-based Warner would pay $25 million for 2 million shares of the Los Angeles-based independent film maker’s cumulative preferred stock and another $25 million for secured notes of Cannon subsidiaries, according to persons familiar with the details.

Option on Theater Chain

Warner obtained a two-year option to buy a half interest in the theaters for the same amount, $50 million.

Separately, Warner paid Cannon $25 million in cash Tuesday as part of the terms for getting U.S. video distribution rights on some 20 Cannon films. Meanwhile, Warner also temporarily guaranteed a $50-million “bridge” loan from Cannon’s U.S. banks until Warner and Cannon complete their securities deal.

The arrangements, coming after extended negotiations, enabled Cannon to pay immediately a delayed installment of about $77 million on debt held by Australian Alan Bond. That debt, twice extended from a Dec. 15 original deadline, stemmed from Cannon’s $270-million purchase of a British theater chain and movie studio. The last installment of $30.6 million has been converted into four-year senior subordinated notes due Dec. 19, 1990.

Cannon President Yoram Globus said Tuesday that the transactions, including a “short-term” increase in its bank credit lines, “provide Cannon the liquidity and capital to stabilize our financial condition and to pursue our business plans over the next year.”

Cannon’s stock dipped after the news was announced, closing at $13.25 a share, down 50 cents, on the New York Stock Exchange. A Wall Street observer noted that if Warner should convert the Cannon preferred and warrants to common stock, the value of Cannon common would be diluted.

Chairman Menahem Golan and Globus together presently control about 40% of Cannon’s common stock.

Cannon still faces problems posed by a broad Securities and Exchange Commission investigation of its film accounting practices and by a special audit of its nine-month financial results by its new independent auditor, Arthur Young & Co. The company has said the audit might result in substantial revision of its 1986 quarterly earnings reports.

Little Risk for Warner

Warner, a major studio that has previously distributed a few of Cannon’s higher-cost films, was generally credited with having arrived at deals Tuesday that carry little financial risk.

In addition to preferred stock convertible into 2 million Cannon common shares for $12.50 each, Warner is to receive warrants enabling it to buy another 750,000 for $15 each. The announcement said Cannon issued to Warner 500,000 of the warrants on Tuesday, with the rest to be turned over upon completion of the securities purchase. According to a Warner official, it could end up with 2.75 million of 11.8 million Cannon common shares outstanding after conversion of both preferred stock and warrants.

The parties said Warner could buy 50% of the Cannon theater properties in England, the Netherlands and Italy by tendering the secured notes and either the preferred stock or a short-term note for the balance. The announcement said the $50-million purchase price was based on “an estimated value of approximately $183 million, including existing debt.”

The announcement did not specify which Cannon films were involved in the sale of domestic video rights. Warner already holds all U.S. theatrical, pay-TV and home video rights to two Cannon films being produced at budgets much above average, “Over the Top” and “Superman IV.”

Cannon said that in connection with Tuesday’s transactions, it entered into agreements with its domestic banks “to restructure and extend certain credit agreements including financing for Cannon’s ongoing production activities.”