Cypress Group Enjoys Cinemark Ending –

In the LBO version of a Hollywood ending, The Cypress Group exited its investment in Cinemark Inc., agreeing to sell the theatre chain to Madison Dearborn Partners in a $1.5 billion deal.

“We’ve been in the investment for eight years now,” Cypress Managing Director William Spiegel said. “We were able to weather a difficult time for the [movie theatre] industry, and after a couple good years, we thought it was the right time to return money to our limited partners.”

Cypress’s investment in Cinemark came out of its Cypress Merchant Banking Partners I fund. The firm originally made the investment in February 1996 through the $139.2 million buyout of a minority partner. Lee Roy Mitchell, the founder of Cinemark, maintained his majority stake during the investment. Through the sale to Madison Dearborn, Cypress will record a return of just under 3x its total equity.

While the exit went off without a hitch, the investment had to overcome some trying times in the movie theatre industry. And as rival chains fell into bankruptcy amid failed reconstruction efforts, Cinemark was able to continue expanding its bottom line.

“During the life of our investment, we were able to grow every year,” Spiegel said, adding that EBITDA grew from $50 million to $200 million throughout Cypress’s eight-year holding period.

The cinema industry’s struggles, dubbed by some as the “overscreening of America,” were primarily brought on by an expansion that left movie-goers with too many theatre options and not enough choice movies. Cinemark, though, kept its focus outside of the major metropolitan arenas, and was able to rein in its expansion before it was too late.

“We really tried to focus on the underserved markets,” Spiegel said. “We wanted to build theatres in markets that didn’t invite competition, so we targeted the suburbs and, internationally, went into Latin America.”

Moreover, Spiegel said, “We were disciplined in our capital expenditures and maintained a very strict hurdle rate for new investments in the company’s theatres. Cinemark was one of the first to cut back [during the industry downturn]…And we worked hard to ensure that the company always had an appropriate capital structure.”

Madison Dearborn

Grabs Front-Row Seat

In buying the business, Madison Dearborn will reportedly acquire an 80% stake through grabbing control of the full Cypress share and more than half of Mitchell’s majority stake. Published reports have pegged Madison Dearborn’s equity contribution at a minimum of $400 million, while Lehman Brothers and Goldman Sachs will provide financing in the form of a $270 million senior debt facility and a $105 million high yield offering. The investors will also keep intact a significant slice of Cinemark’s existing $560 million debt package, and will fill in the balance of the purchase price with additional equity from select co-investors. Calls to Madison Dearborn were not returned by press time.

The acquisition of Cinemark is expected to close in April.

Snapshot

Buyer: Madison Dearborn Partners

Target: Cinemark Inc.

Seller: Cypress Group

Purchase Price: $1.5B

Advisors: Cypress: Lehman Brothers and Goldman Sachs; MDP: Allen & Co. and Baker & McKenzie

Legal Counsel: Cypress: Akin Gump Strauss Hauer & Feld LLP; MDP: Kirkland & Ellis LLP