Filing for Chapter 11 bankruptcy protection is a hard-nosed decision that has put Edwards Theatres Circuit Inc. in a better position to cut some unwanted costs and to ride out a withering downturn in the movie-house industry.
But it’s also a risky move for the founding Edwards family, the sole owners of the 70-year-old Newport Beach-based theater chain. The family may or may not emerge from the bankruptcy process with ownership control or even operating control of the company, one of the largest theater chains in the country. The outcome rests largely with Edwards’ lenders, led by Bank of America.
“It depends on how aggressive Bank of America is going to be,” said one person close to Edwards’ operations.
Moreover, it is uncertain at this point how much, if any, equity is left in the company, since some numbers suggest that the company’s obligations,$217 million in bank loans and an estimated $20 million to $40 million in other creditor claims,is greater than its enterprise value.
“There are scenarios that could result in the elimination or reduction in the percentage of the equity owned by the current shareholders. It’s hard to say at this time,” said Jeffrey M. Reisner, a partner in Irell & Manella, the bankruptcy law firm representing Edwards’ unsecured creditors. That group includes the 28 landlords of aging and money-losing theaters that have been closed, as well as property owners whose projects Edwards has pulled out of.
And for a family that has always guarded its privacy when it comes to business matters, filing Chapter 11 has drastically changed the ground rules. Now Edwards will have to disclose virtually everything about its business operations and endure media coverage of its wrangling with creditors.
The current situation is a far cry from 1997, when the late movie-house industry patriarchs Stan Durwood of Kansas City, Mo.-based AMC Entertainment Inc. and James Edwards Jr. (but known as “Senior”) held secret talks about AMC acquiring at least a piece of Edwards Theatres.
Back then, the theater business was entering a growth phase; a sale of the entire Edwards Theatres chain probably would have netted a ballpark $100 million for the family, according to an estimate of one person who has seen the company’s books. (That figure is based on an estimated $25 million a year of operating profit and a standard industry valuation multiple of six to eight times earnings, minus a “guesstimate” that the company had $75 million of debt at the time. Operating profit is defined as EBITDA,earnings before interest, taxes, depreciation and amortization.)
Instead, later in 1997 James Edwards III (“Junior”) called off the talks with AMC shortly after his father’s death and proceeded with Senior’s ambitious expansion plans.
Industry-wide Strategy
That expansion was part of an industry-wide strategy of borrowing heavily in order to finance gleaming new cinema megaplexes across the country. But the industry overbuilt, and the result has taken a financial toll on virtually all of the big theater chains, including AMC. As customers flocked to the new regional complexes, they abandoned older neighborhood theaters, strapping the chains with money-draining dinosaurs that have hampered or prevented them from meeting their new, higher debt obligations (see companion story, page 21).
In its Aug. 23 bankruptcy filing, Edwards noted that “industry analysts estimate that the industry needs to drop from its current level of 38,000 screens to less than 30,000.”
Just days before Edwards filed for Chapter 11 protection, Carmike Cinemas Inc. of Columbus, Ga., the nation’s third-largest chain, also did so. Last week, Englewood, Colo.-based United Artists Theatre Co. followed suit. Earlier, Mann Theatres and Silver Cinemas went the Chapter 11 route. Loews Cineplex and AMC have also warned of financial difficulties.
So far, the workouts have not been kind to existing stakeholders. In its filing last week, United Artists presented a pre-arranged restructuring plan in which the banks will swap their debt for a minority share of the new equity. Bondholders will get warrants for an even smaller percentage of the new shares. The company’s old shareholders, primarily Merrill Lynch Capital Partners fund, will see their investments wiped out. Emerging with 55% control of the company will be billionaire Philip Anschutz, who recently paid 70 cents on the dollar for 21% of UA’s $440 million face-value syndicated loan.
Will Edwards also become prey to a vulture investor? The answer is likely to hinge on Edwards’ banks, led by Bank of America, the agent for the secured-creditor bank group owed $215 million. Observers doubt the banks would want to unload a premier movie chain like Edwards for a fire-sale price, so vultures may not be welcome.
On the other hand, it’s an open question how much ownership the Edwards family might have to cede in exchange for more favorable loan terms or a capital infusion, or whether the company can sell off enough or restructure enough to retain its current ownership setup. One observer wondered whether the Edwards family itself might step forward with some cash.
Broad Exit Strategy
Neither officials at Edwards nor at the banks could be reached to comment for this story. Calls to Chief Executive James Edwards and President Stephen V. Coffey were returned by a spokeswoman, who said she was unable to get answers to questions by late last week. A message to Dudley Mendenhall, Banc of America Security’s point man on media and entertainment investments, went unreturned as well, as did a message to Brian L. Holman in the Los Angeles office of White & Case, counsel to the bank group.
An investment banker who has been following the Edwards situation suggested that the banks may decide to try to ride out the current industry downturn: “They may say, ‘Why don’t we sell it in the next upturn? In the meantime, we’ll adjust the debt, cut it back to $130 million, say, and put the rest into deeply subordinated notes the company won’t have to pay on for a while, and we’ll take all of the equity, or 90% of it.’ ”
Similarly, a person close to the Edwards business said the family could emerge still running the restructured operation, but with a reduced ownership share or performance-based options. “They’ll end up with basically a hope ticket.”
In its bankruptcy filing, Edwards defines its “exit strategy” in very broad terms: “to emerge from bankruptcy via recapitalization with an outside investor, a ‘stand-alone’ plan or reorganization, or to consummate an asset sale or sales to one or more third parties.”
Edwards is still seen as a premier player in its industry, with some of the newest and best theaters concentrated in one of the country’s most affluent regions.
Edwards said the 28 leases it is rejecting collectively generated losses of more than $5 million in its fiscal year 2000. Indeed, while Edwards in its initial court filing painted a bleak pre-bankruptcy picture, its post-petition cash flow projections suggest a near-miraculous turnaround.
Edwards said it filed the bankruptcy because of its inability to get landlords to renegotiate leases voluntarily and because $13 million in loan principal and interest payments was coming due, after which it “likely still would be in default of various loan covenants.” Bank of America already had issued a notice of default to Edwards prior to the filing.
Between fiscal year 1998 and fiscal year 1999, the company said its net income dropped from $14.1 million to a negative $39.5 million (on revenue for fiscal 1999 of $299 million). The company attributed the loss mostly to a $31 million restructuring charge,as Edwards already had started closing unprofitable locations,and to an $8 million rise in interest charges.
The company said its cash flow changed even more drastically between the two years, falling from $84.3 million to a mere $571,000. The company said this was due partly to the fact that with construction slowing the company began paying down accrued trade debt.
The company’s cash flow forecast for the remainder of this year, which was included in its filings, shows the company now piling up cash at the rate of well more than $1 million a week (before debt service), and growing its cash balance from $8 million at the time of the filing to a projected $34 million by year’s end.
The 1998 and the projected cash flow figures shown in the company’s court filings are much higher than the cash flow estimates made for the Business Journal by people familiar with the company’s operations.
Observers said a clearer picture of Edwards’ finances should emerge in the coming weeks as more detailed filings are made. They said it is common for a debtor who wants to continue running a company to present as rosy a future scenario as possible, in part to dissuade a judge from thinking that the company would benefit from a change of management.
Persons familiar with Edwards said the company’s post-petition operating profit (EBITDA) probably will be in the ballpark of $25 million to $35 million a year. Using a valuation multiple of seven, that would put the enterprise value of value Edwards at between $175 million and $245 million,well short of the bank debt alone on the lower end, or just enough to cover the bank debt and other creditor claims on the high end.
But whether any theater chain could fetch such a high multiple at the current time is doubtful, because there appear to be so few takers.
In its over-built state, the movie theater industry seems ripe for consolidation. Yet the most likely consolidators, the big chains themselves, are almost all financially strapped. That has given rise to speculation that super-rich vultures will swoop in,Anschutz has been mentioned as one possible buyer of theaters, as has Sumner Redstone, whose Viacom is partner with Time Warner Inc. in WF Cinema Holdings, which bought Mann out of bankruptcy.
The apparent lack of buyers willing or able to pay top dollar is one of the factors that could work in favor of the Edwards family retaining control of the company. Contrary to an earlier public denial by James Edwards, and as reported in the Business Journal and now in court filings, an effort was made earlier this year to market Edwards for sale. Bank of America has expressed displeasure with the way Edwards handled that effort, which apparently did not produce a buyer or an equity investor.
Meanwhile, it’s not uncommon for bankruptcy proceedings to get off to a rocky beginning, and that was the case with Edwards last week as Bank of America charged the family with lavish spending. The court hearing featured arguments over whether Edwards or the bank should control the theaters’ popcorn money. The company won that skirmish.
To find out the ending to this show, you’ll have to keep watching. n
