Cineplex Odeon Corp., the Canadian movie theater company that joined with MCA Inc. in 1986 to build a Florida theme park, bowed out of the project Wednesday by agreeing to sell its 50% stake to the Rank Organisation of Britain for $150 million.
Mounting debt apparently prompted the withdrawal of Cineplex, which is 49% owned by MCA. According to financial results released Wednesday, the Toronto concern’s long-term debt climbed to nearly $664 million at the end of 1988 from $450 million a year earlier. MCA, for its part, hailed the deal with Rank because the British company appears better suited to join MCA in a possible theme park venture in Europe.
“MCA has said they’re looking at the possibility, and certainly we would be very keen to cooperate with them in doing that in Europe,” said Michael B. Gifford, Rank’s chief executive and managing director, when contacted in London.
MCA has been actively seeking a site for a major attraction in Europe--possibly in Spain, before the 1992 Olympics to be held in Barcelona. On another front, MCA and Nippon Steel have been exploring the feasibility of a Japanese theme park for over a year.
Taking on Disney
MCA’s push in the theme park business on three continents pits the company squarely against industry giant Walt Disney Co., which already reaps royalty fees from Tokyo Disneyland and is building another park in France. Both companies already operate tourist attractions in Southern California, and they are engaged in a race to build studio facilities and tour attractions in central Florida. Their Florida sound stages have already opened for business, and Disney’s tour attraction debuts next month, with MCA’s set for 1990.
For the year ended Oct. 31, Rank posted earnings of $277.9 million on revenue of $1.46 billion. The company’s assets range from a venture with Xerox to hotel and vacation resort properties. Although Rank got its start as a film producer, it now restricts those activities to co-financing and distributing about a dozen films each year outside North America. It owns Pinewood Studios, film processing laboratories and has been rapidly expanding its video duplicating operations.
Just last month, Rank closed a different transaction with Cineplex Odeon by purchasing 49% of its Film House post-production subsidiary with an option to buy the remainder by the end of the year.
Until recently, Cineplex was bent on expansion--at a pace and cost that alarmed some shareholders who spoke out at the company’s annual meeting last May. At that time, the company vowed to increase its borrowing capacity of $800 million--and ultimately did so--but began shedding assets during the summer, beginning with the sale of 57 Canadian theater properties for a gain of $42.5 million.
Calls to Cineplex Chairman Garth H. Drabinsky and Vice Chairman Myron I. Gottlieb were not returned Wednesday, but MCA President and Chief Operating Officer Sidney J. Sheinberg acknowledged that the scope of the $500-million Universal Studios Florida project had exceeded Cineplex’s grasp.
“Did it turn out to be more expensive than we thought? Obviously. Did it become too big for Cineplex? Yes,” Sheinberg said. But the MCA executive said he would “take great umbrage” if anyone suggested that costs had gotten out of hand.
According to the companies, Cineplex had invested $92 million in the Florida venture. Cineplex said it would use the proceeds to reduce its debt.
“They’ve talked so much about how good it would be; I’m surprised that they’re getting out,” said Harold Vogel, a securities analyst at Merrill Lynch in New York. But he added that a reduction of Cineplex’s debt would appear to be a prudent move if a recession materializes later this year, as some economists predict.
Separately, Cineplex issued its year-end results. The company reported pretax income of $44.1 million, which included a gain of $55.1 million from the sale of certain theaters and Film House and writeoffs of $24.1 million from its film operations and the sale of a health-care investment.
Excluding those gains and write-offs, the company’s 1988 pretax income appears to be $13.1 million, with a fourth-quarter loss of $11.9 million, said one securities analyst who asked not to be identified.
MCA searched five years for an appropriate partner in the Florida venture before choosing Cineplex in December, 1986. The deal capped a year of enthusiastic dealings with the Toronto company and its energetic chairman. In the preceding 12 months, the two companies had agreed to build an 18-screen theater complex at MCA’s Universal City headquarters, and MCA had purchased half of Cineplex’s stock for $159 million.
There have been occasional differences between the two companies on the Florida project, Sheinberg said, but those had “zero relevance” to Cineplex’s decision to sell its stake. “The contributions that Cineplex made were extraordinarily constructive,” the MCA president said, declaring: “This transaction does not signify any change in the relation between MCA and Cineplex.”
In a historic twist, the business dealings between Universal and Rank date back to the post-World War II era, before the studio was acquired by MCA (at that time, a powerful talent agency).
Rank was best known for family-style movies in the 1950s and 1960s, until its 1956 investment in the predecessor to Xerox began to dominate the company. Profits from Rank Xerox Cos. were squandered, some said, on investments ranging from home appliances in Australia to holiday camps.
In 1983, Rank’s poor performance triggered a highly publicized revolt by institutional shareholders, resulting in the recruitment of Gifford--a former finance director at Cadbury Schweppes PLC--to run the company.
Contrary to some predictions, Gifford chose not to divest the company’s recreational holdings but to expand aggressively.