Sony, Cineplex to Combine Movie Theater Operations

Sony Corp. of America and Canada’s Cineplex Odeon said Tuesday that they will merge their movie theater operations into a chain that will boast of being the world’s largest, with about $1 billion in annual revenue.

News of the deal comes as theater owners are under increasing pressure to consolidate to save on costs, gain clout with distributors and finance large-scale expansion projects such as complexes with stadium-style seating and state-of-the-art technology.

“It’s really become an industry that needs to modernize itself,” said Jeffrey Logsdon, an analyst with Cruttenden Roth in Irvine.

Although Hollywood’s overall box office was healthy this summer, movie theater owners didn’t enjoy proportional benefits. That is, in part, because so much of the box-office revenue these days is generated in the first couple of weeks after a movie opens, when studios release films at thousands of theaters and carve out a much higher percentage of the gross. Studios typically get a larger portion of the early revenue.

The merger may raise antitrust questions in some markets--though not in Los Angeles--by consumer groups concerned that the combined company would raise ticket prices. Company executives said they are confident they will receive the necessary government approvals in the U.S. and Canada.

The new company, called Loews Cineplex Entertainment, would have 2,600 movie screens in 460 locations in North America, slightly behind the number of screens owned by Carmike Cinemas Inc. In addition to Sony’s Loews and the Cineplex theaters, the new company also would include cinemas in Sony’s joint ventures with Magic Johnson Theaters and Star Theaters.

Under the deal, Sony’s retail entertainment group would own 51.1% and have 49.9% of the voting rights. Also owning a chunk of the new company would be longtime Cineplex investor Universal Studios Inc., which would control 26% of the company following a cash infusion of $84.5 million.

Cineplex shareholders would own 13.3%, with the Charles Rosner Bronfman Family Trust of Canada owning 9.6%. The Bronfman family’s Seagram Co. owns Universal.

Cineplex has long struggled with a heavy debt load, and analysts viewed the merger as critical to restoring the Toronto-based company’s health. “It’s a merger of necessity,” said Cowen & Co. analyst Paul C. Marsh.

But Cineplex Chief Executive Allen Karp disagreed, saying the deal is more about opportunity.

“I wouldn’t call it a merger of necessity. We’ve suffered from capital constraints, had a real challenge and were looking to recapitalize our company. We were blessed with an opportunity to do so,” Karp said.

Analysts expect Sony to call the shots, although Sony Retail Entertainment President Lawrence J. Ruisi disagreed.

“This is not an acquisition. This is not a situation where Sony is buying Cineplex Odeon, and Sony is going to decimate Cineplex Odeon management,” Ruisi said.

In the 12 months ended Aug. 31, the new company would have generated about $700 million in box-office revenue and about $140 million in pretax earnings. It also would have combined debt of about $700 million.

The new company’s board would have 16 members, six from Sony, three from Universal, four independent members, one from the Bronfman trust as well as Ruisi and Karp.