Proxy Tells of Tri-Star Plan for $100-Million Reserve if Merger Proceeds

Tri-Star Pictures, the upstart movie company that will soon combine with the much-greater entertainment holdings of Coca-Cola Co., will establish a reserve of $100 million for writeoffs and costs but emerge with a clean slate next March when the combined company begins a new fiscal year, judging from proxy materials released Wednesday.

If approved by Tri-Star shareholders Dec. 15, the combination will result in a new company called Columbia Pictures Entertainment. As announced Sept. 1, Coca-Cola Co. will initially hold an 80% stake in the combined entertainment company but will reduce its holdings to 49% by distributing stock to its own shareholders as a taxable, one-time dividend.

Unanswered, however, is the question of how well Coca-Cola fared with its acquisition five years ago of Columbia Pictures Industries, and with other entertainment acquisitions such as Embassy Communications and Merv Griffin Enterprises.

“That’s the question. That is the $64 question,” said David Londoner, a securities analyst with Wertheim & Co. in New York. “It’s a very complicated situation which will take a considerable amount of analysis. It shouldn’t be done superficially.”

Some analysts said it might take a week to pore over the proxy materials to discover “how much they put in, how much they took out--and what’s left,” as Londoner put it.

The book value, or net worth, of Tri-Star was $265 million as of July 31, while the book value of the Coca-Cola Entertainment Sector was about $745 million.

Coca-Cola said its management will recommend to the Coca-Cola board that the stock dividend be distributed to shareholders before Jan. 29; the company also said Tri-Star has agreed to shoulder the tax burden that may be incurred by Coca-Cola as a result of the distribution. Coca-Cola said its preliminary estimates indicate that no reimbursement will be necessary if Tri-Star shares are trading at $11 or less at the time of distribution at the end of January.

But Tri-Star shares closed at $11.50 in over-the-counter trading Tuesday, the day the proxy materials were filed at the Securities and Exchange Commission, and closed at the same price Wednesday. If the stock trades at $12 when the dividend is distributed, the tax cost to Tri-Star will be $5 million. If the stock trades at $13, the cost will jump to $18 million, with an additional $13-million cost for every additional $1 increase in the market value of Tri-Star shares.

“At the beginning of October, the stock was at $15. It’s not unreasonable to think it could approach that again in the near future, given the strong growth potential of the company,” said Lisbeth R. Barron, a securities analyst at Balis Zorn Gerard Inc., a New York investment firm. “At $15, the tax cost would be $44 million.”

If incurred, the tax costs would not be an earnings writeoff because, “from an accounting standpoint, Tri-Star is viewed as the acquired company and the cost will be capitalized,” said one source familiar with the deal.

Tri-Star’s long-term debt currently represents 45.7% of its total capitalization; the figure at the new company will be 31.5%, comparable to such industry leaders as Warner Communications (24.5%) and MCA (32.3%), Barron said.

The proxy materials confirmed what Hollywood has known: Neither Columbia nor Tri-Star has had a stellar year at the box office. For the nine months ended Sept. 30, Coca-Cola Entertainment Sector posted net income of $49.5 million on revenue of $791.2 million, compared to net income of $95.4 million on revenue of $1 billion in the nine-month period a year earlier. This year’s results included a $14.3-million gain on the sale of the Walter Reade theater chain.

Tri-Star reported net income of $2.2 million on revenue of $259.9 million for the six months ended Aug. 31.

The combined company will boast assets of $3.1 billion.

The proxy materials also provide a glimmer of behind-the-scenes life in Manhattan’s 711 Fifth Ave. building, where Tri-Star, Coca-Cola Entertainment, Columbia Pictures and Allen & Co. all are headquartered.

The building itself will be kept by Coca-Cola, which will negotiate a new lease for the combined entertainment company, raising the rent to about $5.5 million the first year, up from about $836,000 paid by Tri-Star in 1986. The proxy did not disclose the equivalent of the rent for space currently occupied by Columbia Pictures and Coca-Cola Entertainment.

Allen & Co., the investment banking firm that helped take Tri-Star public in 1985, will collect a $5-million fee for its role in the current deal in addition to $4.3 million collected in 1986 for other services.

Herbert A. Allen, the investment banking firm’s 47-year-old president, will join the combined company’s 13-member board. Allen, who held a pivotal block of Columbia Pictures stock before the company’s sale in 1982, is also a member of Coca-Cola’s board. He owns a 25% interest in a Gulfstream airplane that is 75% owned by the Coca Cola Entertainment Sector.

In addition to Allen & Co., Tri-Star retained Merrill Lynch Capital Markets to render a written opinion on the fairness of the proposed deal to its board on Sept. 30 and agreed to pay an undisclosed fee. Merrill Lynch has received $7.4 million in payments since Jan. 1, 1986, from Tri-Star for other services.

Three of Tri-Star’s 10 directors did not attend the special board meeting Sept. 30: two Coca-Cola executive vice presidents, Francis T. Vincent Jr. and Ira C. Herbert, and Home Box Office Chairman Michael J. Fuchs.

Fuchs will remain on the combined company’s board, but Herbert and Vincent--who had served as chief executive of Columbia Pictures Industries since 1978--will depart.

Other board members will include current Tri-Star Chairman and Chief Executive Victor A. Kaufman, who becomes chief executive and president of Columbia Pictures Entertainment, and Donald R. Keough, the president and chief operating officer of Coca-Cola who will assume the additional duties as chairman of the new entertainment company.