Theater Owner’s Coming Attraction: Healthy Profits : Entertainment: Analysts say the United Artists movie chain faces an uphill battle. But Stewart Blair is optimistic.

For 10 years, Stewart Blair was a close disciple of John Malone, the forward-thinking chief executive of Tele-Communications Inc., the nation’s largest cable television company.

Throughout the 1980s, the two executives invested in advanced technologies and even built cable systems on foreign soil.

But Blair spurned those cutting-edge ventures when he decided to go out on his own.

In May, the 43-year-old Scottish immigrant led a buyout of the United Artists movie theater circuit from TCI for $680 million. United Artists is the nation’s largest theater circuit, with 2,376 screens, or about 10% of the total. Yet the theater business is mature, with scant prospect of dramatic growth. Why is Blair betting his future on movie exhibition, which is considered a dinosaur by many in the entertainment industry?

Blair maintains that the movie-theater business is more promising than skeptics believe. He and other UA executives describe their theater chain as an annuity, capable of generating predictable--and increasing--cash flow. Friends expect him to use the company as a springboard to more exotic ventures, and Blair admits that he would like to invest in international theaters and cable television.

Blair’s game plan requires United Artists to increase its operating cash flow at an annual rate of 5% to 10% by increasing concession sales while unloading inefficient theaters.

That’s easier said than done, according to some executives who know the movie exhibition business. Even Blair doesn’t dispute these facts: Too many screens were added in the 1980s, attendance has been stagnant for a quarter of a century and new delivery systems threaten to siphon off more of the audience.

John W. Miller, managing director of Chemical Bank’s entertainment industries group, is skeptical: “When the consumer has increasing options for entertainment, and there’s questionable elasticity in ticket pricing, and with costs growing each year, I just don’t see how you can suck out 5% or more increases annually in cash flow.”

Sumner Redstone, the chairman of Viacom International who made his first fortune in the movie theater business, goes even further. “There is a general eroding dynamic in the industry,” he says.

While Redstone says he won’t sell his National Amusements theater circuit, he pointedly bet his future on cable television when he acquired control of Viacom in 1987. “Anyone who assumes that, on a screen-for-screen basis, cash flows are going to increase is making a pretty aggressive gamble,” he says.

Still, he won’t deny Blair’s abilities. “Stewart is as smart a guy as I know,” Redstone says. “He learned the motion picture business overnight. When you finally get down to it, nothing counts more than management.”

Blair has defied conventional wisdom before. With his Scottish brogue and self-deprecating wit, he has stood out in the American business crowd since he emigrated 20 years ago.

Born in the heart of Glasgow, he was the only child of a Welsh mother and Scottish father who rose from messenger to director at a woman’s fur coat firm. Blair attended the University of Glasgow, then took a job with Chase Manhattan’s London branch after graduation. The following year he was transferred to New York, where he rose rapidly to vice president before his banking career stalled.

“I couldn’t fathom the politics. I didn’t even recognize that there was such a thing as politics,” Blair says, recounting how he lost the job of running the bank’s aerospace lending division to Michael Garstin, a rival who later became a friend and investment banker.

Blair transferred to Chase’s media division, where he caught the eye of Tele-Communications treasurer Donne Fisher. In 1981, Blair moved to Denver to work for the cable TV company, and his career took off again.

“Maybe he’d found a home by the time he got to TCI,” says Brendan Clouston, chief operating officer of the cable TV giant and a close friend of Blair. “TCI is not a very conventional corporation. He (Blair) is, by most American business standards, in the top 1% or 2% intellectually. And No. 2, he has the ability to get deals done.”

During the 1980s, there were plenty of deals to work on. TCI’s revenue grew almost sixfold, to $3.6 billion, in 1990, from $646 million in 1986, largely through acquisitions.

For Blair, the pivotal deal came in 1986, when TCI acquired 55% of United Artists Communications Inc. UA was a proud old company, based at the time in San Francisco. The theater circuit dated back to 1926, and its founding shareholders included Mary Pickford, Douglas Fairbanks, Sam Goldwyn and Joe Schenck. But TCI wanted UA primarily for the newer cable TV division, which had good franchises and better equipment than many of its competitors.

Blair was installed as UA’s chief executive. In 1988, as Blair carried out the decision to move UA’s diverse operations to Denver, UA also acquired United Cable Television in a move that made UA the nation’s third largest cable TV operator. By the end of 1990, UA’s revenue had more than doubled revenue in the 1987 fiscal year.

The pace had its costs. In Denver, Blair was divorced from his Scottish wife who had emigrated to the United States with him. As head of UA, his lifestyle began attracting more attention. Blair was apt to joke publicly about his unmarried status and late-night drinking. At a 1987 convention of theater owners, for example, he wore dark glasses while making a morning speech, explaining that he had toured a number of Atlanta’s bars the night before. In a 1988 meeting with Wall Street analysts, his self-deprecating remarks about his physical deterioration were published by the New York Times.

“Stewart would show up at some analysts’ meeting, and it was 8 o’clock, and he was laughing that he had just gotten in, and the shareholders are saying, ‘Wait a minute . . . is that a lifestyle I want to support?”’ recalls Clouston, who worked with Blair at UA at the time. “Then there would be a few of them who would ask some tough questions, and Stewart is quite capable of ripping someone’s head off, publicly.”

Clouston insists that such performances masked Blair’s genuine shyness. “He wouldn’t like to be described that way, but here’s this nice person from Scotland, who is struggling to find out where he is.”

For a time, it looked as though Hollywood was where Blair yearned to be. UA launched a small motion picture production division called Corsair, which set out to produce smaller-budget films such as “The Miss Firecracker Contest” with actress Holly Hunter. The company lost about $15 million before Blair abandoned production.

The Hollywood excursion fueled speculation that Blair was losing favor with Malone, his longtime mentor, who eschewed the trappings of Tinseltown even though he invested TCI’s money in numerous cable TV programming networks. In a 1990 interview, Malone voiced his support for Blair, but in the spring of 1991, TCI proposed acquiring the remainder of UA that it didn’t already own. The merger eliminated at least $20 million in duplicative overhead costs--and most of the top UA executive jobs. Shortly after the merger was announced, Blair decided to put together a bid for the theater circuit.

Malone, who spent most of the summer in Maine, didn’t return calls about Blair. But Clouston, who returned to TCI last year, says he firmly believes that Blair could have rejoined TCI’s executive suite.

“I can tell you that my sense is, Stewart could be working here today had he wanted to,” Clouston says. “Stewart didn’t want to. Stewart was ready to be completely his own boss, and not in John’s shadow. And therefore, it was time for him to go chase another dream.”

Malone apparently still has confidence in Blair, because TCI agreed to hold $92.5 million in preferred stock in the new UA company. Movie production won’t be a distraction: Blair had already promised his backers at Merrill Lynch Capital Partners that he would not diversify in Hollywood. Merrill Lynch accordingly invested $110 million; Blair’s management team has invested $2.5 million. Insurance companies and other big investors purchased $125 million in notes, while a group of banks committed $300 million.

Compared to the leveraged buy-outs of the 1980s, the UA deal looks downright conservative. The buy-out group paid about a multiple of about six times cash flow, compared to multiples that soared as high as 10 to 12 in the 1980s. Also, UA will be paying less than 9% in interest, compared to 1980s rates in the mid-teens.

“This is a lowly leveraged buyout. I had no wish to leave the security of the TCI empire in exchange for lying awake every night worrying,” Blair says.

If the cash flow grows at 5% to 8%, United Artists should be able to repay half its debt in five years, says Garstin, one of the investment bankers who worked on the UA buyout. He said if the circuit is then sold at the same cash-flow multiple, investors could make a 6-to-1 return on their money. “It can work very, very well,” says Garstin.

But there remains the vexing question: Just how does UA propose to grow at a time when movie attendance is stagnating? Last year, attendance fell to 982 million admissions nationwide--the lowest figure recorded since 1976. And exhibitors pay about half of their box-office gross to Hollywood distributors for film rentals, despite the fixed costs of operating a half-empty theater.

Blair believes that he can entice moviegoers to spend more money at the concession stand. That revenue is not shared with the film distributors. The company has been conducting studies that suggest that a greater percentage of moviegoers would stop at the concession stand if UA could improve the layout and shorten the lines for popcorn and confections.

Just as important is making the circuit more efficient in the wake of the acquisition spree that Blair himself led in the late 1980s. Over a three-year period, UA snapped up five regional chains to improve UA’s market share in large population centers, mostly on the East Coast and in Sun Belt states.

Each regional circuit included some aging theaters or isolated properties that cost UA too much to operate. UA acquired 1,054 screens in those deals. It has sold or closed 570 since 1988, while raising the average number of screens per theater to 4.8 screens, up from 3.9 screens.

Over the next three years, United Artists intends to dispose of 650 more screens, or 25% of the total it has been operating in 34 states. UA will withdraw entirely from 13 states where it has 10 or fewer theaters. UA says the scheme should reduce the company’s administrative costs even though it intends to add 400 screens in its strongest markets, located mostly in California, New York, Pennsylvania and Texas.

The success of the plan, of course, hinges on finding buyers for the unwanted theaters. But over a five-year period, UA has projected that it can hold down costs to an annual growth rate of less than 2%.

Blair says it is unlikely that UA will diversify into other businesses, but he suggests that he and other top company executives may reunite with Merrill Lynch Capital Partners to go into the international theater business or the international cable business. “I think if we did anything of size we’d just create a new vehicle,” Blair says.

As for Blair’s personal life, he just may be settling down. On Oct. 18, he intends to wed Lynn Woodard, a former cable programming executive who recently quit her job as general manager of SportsChannel Los Angeles to plan the event. Although Blair is a naturalized U.S. citizen, the two have decided to hold the ceremony in Scotland.

With his sly wit, Blair insists that someone else gave the liveliest performance when UA hosted a Denver party to celebrate the completion of the buyout. It was an older banker--not Blair--who climbed atop a nightclub table to demonstrate his prowess as a go-go dancer.