It’s a Wonderful Life: Muvico Sells Story In Spite of Industry Dramas

The curtain has fallen on the movie theater sector in recent months, with poor earnings projections, even weaker operating performances and highly leveraged balance sheets all but banishing the industry from the capital markets.

Late last month, however, Fleet Equity Partners, brightened up some of the industry’s gloom by unexpectedly taking a $25 million slice of Muvico Holdings Inc.’s $41.5 Series B round. Additional participants included BCI Partners and The Amatura Group.

“We’ve been looking at this sector for some time now, it’s a great time to move in,” said Michael Joe, a principal with Fleet Equity. “Their’s is a unique strategy, a differentiated product and outstanding management team. It’s because they’re so different, the market for the product is really underserved.”

Fleet, in fact, initiated the Muvico deal by approaching the Ft. Lauderdale, Fla.-based firm, and then bringing the other investors on board. Since 1996, Muvico has raised $74 million in private equity through a $32.5 million angel round and a subsequent Series A investment from BCI.

Each Muvico multiplex is a theme-plex’ with at least 16 screens. Its focus, however, is on service – each theater has not only a childcare center, but also a full-service restaurant, valet parking, bar and balcony. Digital video and sound and stadium seating are also included.

The company operates seven themed megaplexes, totaling 114 screens, throughout South Florida. Muvico will complete the build-out of six new sites late this year and will look for new development projects for 2001 with this round of financing.

“It’s a night out for families,” said Hamid Hashemi, chief executive with Muvico. “We had a visit from The Walt Disney Corp., [because] we’re very highly themed. It’s a great time to be in the industry.”

Dissent at the Box Office

Not everyone would agree with Hashmei’s assessment, however.

Indeed, the movie theater sector has been hit hard over the last several years by what industry analysts call “competitive overbuild:” building too many screens too close together, with neither a large enough population nor or a strong enough film product to support demand. Moreover, innovations like stadium seating and digital sound have made older theatres unable to compete, or even justify the escalating cost of movie tickets.

One example of the industry’s flagging fortunes can the seen in the deteriorating credit profile of industry giant AMC Entertainment Inc.

Moody’s Investors Service recently downgraded two tranches of the company’s 9.50% senior subordinated notes aggregating $425 million to Caa1 from B3. It also lowered the company’s senior implied rating to B1 from Ba3, and its senior unsecured rating to B3 from B2. These moves can be attributed, in part, to heightened competition, high-cost expansion activity and shorter average film lives, which have weakened the company’s operating performance and have diminished its financial flexibility.

Even though Muvico has been unable to avoid the escalating competitive costs of doing business each of its screens costs approximately $1 million to build the company does not believe that private equity investors will have to bear the total brunt of its build-out.

Muvico has secured a $20 million credit facility from GE Capital, and plans to announce the expansion of that credit facility to $45 million within the next 90 days. The company has also secured $60 million of construction financing through Bank Atlantic and Ocean Bank, both based in Miami, Fla.

And, if the public market opens up to the movie theater sector, Muvico might be ripe for an initial public offering, especially since it’s been profitable since the end of last year.

“Once the market opens up and our sector does as well, we have a good story to tell,” Hashemi said. “Investors out there can see through the clutter, [and] we have a great debt capacity.”

Mirror Image?

These aggressive growth plans, however, reminded one industry analyst of the growth strategy of defaulted high yield issuer United Artists Theatre Circuits Inc.

Fearing the possibility of a near-term bankruptcy, Moody’s downgraded United Artists’ senior subordinated ratings last March from Caa3 to C, and the issuer’s senior implied rating to Caa3 from B3, and senior unsecured rating to C from Caa2. At the time, United Artists’ debt totaled $721 million, compared with $414 million at the end of 1997. The company announced it would default on its debt covenants in April, and its outstanding debt is currently trading in distressed territory.

Although AMC’s own bid to expand its circuit has resulted in dramatic revenue growth, “cash flow growth has been much more modest, and both operating income and asset returns remain at very low levels that are insufficient to cover the company’s cost of capital,” Moody’s wrote in a May report. Moody’s cautioned the new theaters are just too big and carry excessive fixed cost structures relative to the industry’s dynamics. It placed AMC on review for a further downgrade.

Muvico, however, is certain that it has not overleveraged its balance sheet.

“I don’t think we’re anticipating the leverage,” Joe said. “The reason all those became so leveraged is because they were overbuilding against existing multiplexes. I don’t think that will happen with the megaplexes – very different.”

Hashemi is also convinced that the industry is not dead. He said that, independent of movie product, box office numbers have grown at a 5.3% annual rate over the past 15 years. –