Cineplex Buyout Attempt Greeted With Skepticism

A bold bid by the chairman of Cineplex Odeon Corp. to take the company private was greeted skeptically Wednesday by some Wall Street traders and analysts who questioned his ability to arrange financing for the $700-million buyout by a Nov. 22 deadline.

Cineplex shares declined 25 cents on the New York Stock Exchange to close at $11, far below the stock’s 52-week high of $16.375.

At current exchange rates, shareholders would receive almost $14 ($16.40 Canadian) per share, if financing can be arranged by Cineplex Chairman Garth H. Drabinsky and Vice Chairman Myron I. Gottlieb. The undertaking is difficult because the movie theater concern is already saddled with more than $600 million in debt, and critics contend that Cineplex overpaid for many of its theaters.

Nevertheless, the Toronto firm said its two largest shareholders--MCA Inc. and the Charles R. Bronfman family--have agreed to sell their holdings if Drabinsky and Gottlieb launch their tender offer for all shares by Nov. 22.

If the sale goes through, MCA will receive $330 million, of which $160 million is its indicated profit for its three-year involvement with Cineplex. MCA had invested about $170 million in Cineplex primarily by issuing MCA shares.

MCA and the Bronfman family--which together own about 61.5% of Cineplex’s stock--retained the right to accept a higher offer if one materializes for the entire company, which has been for sale since June.

“It’s like, ‘Stay tuned. We’re giving you something, but it’s not firm yet,’ ” said Marianne Godwin, communications analyst for the Toronto office of Merrill Lynch. “That’s why the stock market has not reacted favorably.”

At least one source close to Cineplex had predicted that the announcement would send speculators scurrying to “cover” their “short” positions. The stock has been accumulated by short sellers, who borrow stock and sell it on the assumption that they will able to buy shares later at a cheaper price and pocket the difference.

But three traders said Wednesday that they are still betting against Cineplex’s management and the likelihood of the buyout. “If there’s any way of adding to our position economically, I will. I think they’ve really played their last card here,” one said.

And another money manager declared: “The short sellers--as opposed to being discouraged by the new offer--are rubbing their hands together over the prospects of shorting whatever junk paper results from the transaction.”

Sources have indicated that Drabinsky and Gottlieb expect to raise some money through junk bond financing despite that market’s disarray. But that possibility was also greeted skeptically.

Cineplex directors--and the lenders--have been unwilling to see the company sold piecemeal because they might be left “holding the bag with something no one desires,” as one banker explained.

The same banker--who insisted that he not be identified--said his institution would be unlikely to support the management buyout effort. “It’s tough for us to rationalize how we could go forward with the credit (arrangement) with the present management,” he said, explaining, “we have not agreed on a lot of points.”

Financing of up to $100 million could be made available to Cineplex by Rank Organisation of Britain, however, if more than a dozen conditions are met, said Rank Managing Director Michael B. Gifford in a telephone interview. A key condition is that Drabinsky and Gottlieb complete their bid.

MCA and the Bronfmans have agreed in principle to buy and lease back to Cineplex its 18-screen theater complex on MCA’s property in Universal City for $57 million.