When General Cinema bought a major stake in Carter Hawley Hale in 1984 to save the retailer from a hostile takeover by the Limited, it said it did not want to be involved in day-to-day operations of department stores. Instead, it wanted a part in "strategic longer-term" decisions, as a General Cinema executive later put it.
Now, two years later, General Cinema faces perhaps the ultimate strategic longer-term decision: whether to let Carter Hawley Hale live, or die, as an independent company.
With its holdings of preferred stock convertible into 12.2 million shares, or 38.6% of Carter Hawley Hale's common stock, the former "white knight" has the power to determine the success of a new $1.77-billion tender offer for Carter Hawley Hale announced Tuesday by the Limited and shopping center magnate Edward J. DeBartolo Sr.
"They're pivotal," one Wall Street analyst said of General Cinema's role, noting that it has had similar roles at other firms in which it owned major stakes.
For its part, General Cinema, based in Chestnut Hill, Mass., on Tuesday refused to comment on what position it will take on the $55-per-share Limited-DeBartolo offer, or to what extent it has been lobbied by both sides. Several of General Cinema's seven representatives on Carter Hawley Hale's 22-member board of directors did not return telephone calls or refused to comment.
Analysts speculated, however, that the Limited-DeBartolo coalition, called Retail Partners, would not have made its unsolicited offer if it were not confident that General Cinema would accept the bid or at least give it serious consideration.
But analysts said General Cinema has several other options in addition to selling its stake to the Limited-DeBartolo group. It could help Carter Hawley Hale find another friendly "white knight" or wait for a third party to outbid Retail Partners. Or it could sell the stake back to Carter Hawley Hale for a premium. Or it could hold on to the stake, believing that Carter Hawley Hale's improving performance will lift its stock price above $55 per share within a year or so.
Whatever happens, however, General Cinema stands to make a tidy profit, analysts said.
If it sells at $55 a share, it will pocket a pretax gain of about $30.50 per share, or $372 million, thus more than doubling its initial $300-million investment made in 1984. While a "standstill" agreement reached with Carter Hawley Hale in 1984 prohibits General Cinema from selling its stake to one buyer or group until 1991, that limitation does not apply in the case of a tender offer, General Cinema spokeswoman Janine Dusossoit said.
But if General Cinema keeps the stake, it will continue to earn a 10% dividend on the preferred stock, giving it an annual after-tax gain of about $27 million, thanks to a tax loophole--since repealed--that excludes 85% of those dividends from taxation.
"That's spectacular for a $300-million investment," said Emanuel Goldman, analyst for Montgomery Securities of San Francisco.
Such strong returns on its stock investments, however, have come to be expected of General Cinema and its chairman and chief executive, Richard A. Smith.
In recent years, Smith has engineered a number of stock deals that have resulted in hefty profits while maintaining the company's role as the nation's largest theater operator and a major soft-drink bottler.
General Cinema made a profit a few years ago by selling a stake in Columbia Pictures to Coca-Cola. It later bought a stake in Heublein and exchanged it for a stake in RJR Nabisco that is now worth far more. The company also has profitably sold stakes in several radio and television stations.
"These guys are superb portfolio managers," said Harry E. Wells III, director of research at Adams, Harkness & Hill, a Boston brokerage.
But those previous deals, analysts said, pale in comparison to the potential profits that General Cinema can bag from its Carter Hawley Hale stake.
The analysts said General Cinema may be prompted to sell because the long-term capital gains tax will rise from a maximum of 20% to 28% on Jan. 1. With that in mind, Retail Partners said it is prepared to complete its tender offer before year-end so that Carter Hawley Hale's stockholders could claim profits under the lower capital gains taxes.
General Cinema will also have to consider how well Carter Hawley Hale will do by remaining independent, analysts said. Smith has said publicly that General Cinema is pleased with its investment and the recent progress of Carter Hawley Hale, although the Los Angeles-based retailer continues to earn profits below industry averages.
General Cinema is particularly pleased with Carter Hawley Hale's efforts to cut costs and reduce its debt, analyst Goldman said. Carter Hawley Hale's recently announced sale of its underperforming John Wanamaker department store unit was said to be strongly backed by General Cinema.
But these improvements may not be enough to make General Cinema pass up a tidy profit.
"They're not married to Carter Hawley Hale," analyst Wells said. "If somebody makes an offer they can't refuse, they're going to cash in their chips." GENERAL CINEMA AT A GLANCE General Cinema, based in Massachusetts, is the nation's largest motion picture exhibitor and a major independent soft-drink bottler. It has major holdings in Carter Hawley Hale Stores and RJR Nabisco.
Year ended Oct. 31 1985 1984 1983 Sales (millions) $929 $916 $917 Net income (millions) 98.5 73.7 88.2
Assets $945 million
Shares outstanding 22.8 million
12-mo. price range $36.625-$59.00
Tues. close (NYSE) $47.125, up $2.25