MCA Blocks Rival Group’s Bid for Control of Cineplex; Attacks Financial Reports

In an extraordinary move, MCA Inc. has attacked the credibility of the financial reporting practices of its 49%-owned Cineplex Odeon and won a Canadian court order blocking a management-led group’s plan to seize control of the movie theater concern.

Delivering a 1-2 punch, MCA also won the backing of the Quebec Securities Commission staff Friday in opposing a move by Cineplex Chairman Garth H. Drabinsky and some associates to acquire 30% of the company’s common stock from the Charles R. Bronfman family of Montreal. The commission said it would issue a ruling next week.

Despite MCA’s immediate victories, however, the future is uncertain for MCA’s 3-year-old investment in Cineplex, one of North America’s leading theater chains. MCA is barred by Canadian law and a standstill agreement from acquiring more Cineplex shares, and its voting power is restricted to 33% and the election of 5 of Cineplex’s 16 directors.

Industry sources speculated that MCA may try to install a management team more to its liking or try to swap its stock holdings for some of Cineplex’s U.S. theaters. Earlier this week, MCA vowed to the Cineplex board and the Securities and Exchange Commission in Washington that it “has no intention of seeking to acquire control of Cineplex.”

Until the past few days, MCA had put the best face on its relationship with Cineplex and its mercurial chairman and co-founder, Drabinsky, who has skirmished with three other major Hollywood studios.

But an affidavit filed Thursday in the Supreme Court of Ontario alleged that MCA and Bronfman representatives on the Cineplex board “had on several occasions been extremely critical of the management of Cineplex . . . particularly with respect to the financial reporting practices and procedures which management followed.”

The criticism came “over the course of several months prior to early April,” according to the sworn statement made by MCA Vice President Charles S. Paul, a director of Cineplex and chief liaison between the companies. Paul did not provide details except to say that the criticism was “based upon information collected by Jack Richer, chairman of Cineplex’s audit committee.”

Coincidentally, a small research group in Los Angeles on Thursday mailed a damning report on Cineplex’s reporting practices to its institutional investor clients.

Kellogg Associates, publisher of Financial Statement Alert, called Cineplex’s financial reporting “the most aggressive we have encountered” and said it would not be surprised to see an SEC inquiry or shareholder lawsuit launched.

“We are astonished that the auditors for Cineplex signed the auditors’ report that . . . (said the financial statements) present fairly the financial position of the corporation” for the past two years, the Kellogg group wrote.

Efforts to reach Cineplex’s outside accountants--Thorne, Ernst & Whinney--were unsuccessful late Friday, but Dow Jones News Service quoted the firm’s Peter Doyle as saying he saw no reason to change or qualify the auditor’s report on Cineplex’s 1988 results. Doyle was quoted as saying he was “not concerned by any comments made by MCA in this connection.”

The MCA-Cineplex rift is being tracked closely not only by investors and Hollywood executives but by Jewish leaders in both Canada and the United States. Drabinsky is set to receive the B’nai B’rith International Distinguished Achievement Award on May 7 in New York City, with none other than Charles R. Bronfman and MCA President Sidney J. Sheinberg acting as co-chairmen of the black-tie event, which costs $1,000 to attend.

Further Irony

With further irony, a Toronto attorney noted that on Thursday--the very day Drabinsky was enjoined from buying the Bronfman stake--Toronto was celebrating “Cineplex Odeon Day” in honor of the company’s 10th birthday.

Almost from its inception, Cineplex has lived in the limelight because of the scrappy Drabinsky and his longtime associate, Myron I. Gottlieb, who now serves as vice chairman. In 1982, the upstart Cineplex persuaded the Canadian government to launch an antitrust probe of Hollywood’s six largest film distributors for their practice of licensing films to Cineplex’s much-larger competitors--and ultimately won a favorable settlement.

Cineplex was pulled from the brink of bankruptcy in 1982 by Drabinsky and Gottlieb, but they also made headlines in 1983 when they were reprimanded by the Ontario Securities Commission for failing to disclose a serious deterioration in the company’s working capital in a press release the prior year.

Cineplex officials were not available for comment late Friday, and MCA’s Sheinberg did not return a call. MCA Chief Financial Officer Harold Haas, who also serves on the Cineplex board, declined comment.

In recent SEC filings, Drabinsky has stated that his group of investors hopes to gain “de facto” control of Cineplex, with a long-term possibility of selling assets or taking the company private. To that end, the group agreed to buy out the Bronfmans’ 30% stake--and touched off the war with MCA.

CINEPLEX ODEON AT A GLANCE

Toronto-based Cineplex Odeon Corp. is an entertainment company with primary operations in exhibition and distribution of motion pictures.

Year ended Dec. 31

1988 1987 1986 Sales (millions U.S.) $695.8 $520.1 $357.0 Net income (millions U.S.) 40.4 34.6 22.5