L.A. Firm Objects to Bid for Controlling Block in Theater Chain : MCA, Cineplex Chairman Begin Public Feud

MCA Inc., once enamored with its investment in Cineplex Odeon Corp., has begun a public battle in Canada to block Cineplex Chairman Garth H. Drabinsky from acquiring a controlling block of stock and possibly taking the movie theater company private.

Quebec Securities Commission Chairman Paul Guy said Monday that MCA has objected to Drabinsky’s plan to buy the holdings of the Charles R. Bronfman family and his associates in a private transaction for $17.50 a share (Canadian).

As a result of the MCA action and questions raised by its own staff, the Quebec Securities Commission has scheduled a public hearing Friday in Montreal to determine whether Drabinsky’s proposal can be allowed under Canadian laws governing takeovers, Guy said.

Meanwhile, the Drabinsky-led group notified the Securities and Exchange Commission in Washington that the group’s intent is to make a profit from the investment. The group said it has no immediate plan but might eventually urge Cineplex to sell assets, repurchase shares or take steps to become a closely held company, delisting its shares from the New York Stock Exchange and/or the Toronto Stock Exchange.

“It seems that things are beginning to unravel,” said one securities analyst, who asked not to be identified. Because MCA executives have a standstill agreement not to purchase more Cineplex shares, the analyst said, “they seem to have gotten themselves boxed into an illiquid investment where they’re not calling the shots.”

Top MCA officials who serve on the Cineplex board were unavailable for comment Monday, and Drabinsky did not return a reporter’s call. But there have been indications recently that the companies’ relationship has frayed.

Last month, Cineplex pulled out of its 50-50 partnership with Universal City-based MCA to construct a theme park attraction called Universal Studios/Florida. The sale of the Cineplex stake to Rank Organisation for $150 million was characterized as an effort by Toronto-based Cineplex to reduce its considerable debt, which stood at nearly $664 million at year-end.

At the time, MCA President Sidney J. Sheinberg insisted that occasional differences between the two companies on the Florida project had “zero relevance” to Cineplex’s decision to pull out.

Last week, however, after the Drabinsky group announced its plans to increase its holdings to between 34% and 40% of Cineplex’s common stock, an executive close to the two companies indicated that MCA would be uneasy if Cineplex went private, no longer filing detailed financial statements required by publicly traded companies.

The source speculated that the entrepreneurial Drabinsky, for his part, chafes with a large American company as his largest single shareholder. MCA has controlled 33% of Cineplex’s voting shares--or up to five seats on the 16-person board--since 1986, when it paid $159 million for the shares.

Drabinsky’s move to gain the upper hand over MCA stunned one analyst who has followed the company closely. “Why would (Drabinsky) burn one of the last bridges he’s got?” he asked, alluding to Cineplex’s past feuds with three other powerful studios: Walt Disney Co., Paramount Pictures and Columbia Pictures.

For nearly a year, Cineplex shares have been under pressure from short-sellers who have wagered that the price of the stock will fall. Some analysts have questioned whether the company’s cash flow will prove sufficient to cover its operating costs and interest payments on its borrowings.

Although Cineplex reported $44 million in pretax income for the year ended Dec. 31, 1988, one analyst estimated that the company would have reported a pretax loss of nearly $26 million in its continuing operations if adjustments are made for the asset sales, writedowns and certain operating expenses that have been capitalized.

“They’re not making any money,” said another analyst, who spoke on the condition that he not be identified, because, in his view, the mood has become “ugly.” The company has ceased returning his phone calls, he said, but “it is painfully obvious the Bronfmans wanted to sell.”

The Bronfmans’ support had been deemed critical by some investors because they are members of one of Canada’s wealthiest families and are considered shrewd investors.

Cineplex shares closed at $14.875, up 37.5 cents, on the New York Stock Exchange, with a volume of 891,000 shares. At the Toronto Stock Exchange, Cineplex closed at $17.50 (Canadian)--the very price that Drabinsky agreed to pay the Bronfmans for their shares.