In a deal that would create the world's largest chain of movie theaters, financiers Kohlberg Kravis Roberts and Hicks, Muse, Tate & Furst said Tuesday that they will acquire Regal Cinemas for $1.5 billion in cash and merge it into two other major chains they own.
Regal, based in Knoxville, Tenn., would be combined with ACT III Cinemas, which KKR already owns, and Hicks Muse's United Artists Theater Group, in a deal the companies valued at $3 billion.
Both buyout firms have been active in acquiring theater chains as the industry consolidates. Theater owners are combining operations to save money on costs, eliminate unprofitable locations and gain the critical mass needed to finance and build huge multiplexes. They are also spending large sums of money on more comfortable seating as well as improved sound and projection systems.
In October, Sony Corp. of America and Canada's Cineplex Odeon said they would merge their cinema operations into a chain with about $1 billion in revenue.
The combined Regal, Act III and United Artists chain would be twice the size of Carmike Cinemas, currently the industry's largest in number of movie screens. Combined, the chain would have 5,347 screens in 727 theaters in 35 states, giving it about 17% of the nation's screens.
Both Regal and United Artists, based in Englewood, Colo., have operations in Southern California, although neither is a dominant player here. Both have theater complexes in the South Bay and Ventura County areas, but for the most part they operate in separate areas. United Artists is unaffiliated with the movie distributor by the same name that is owned by Metro-Goldwyn-Mayer.
There were mixed opinions in the industry as to whether the chains will face any federal antitrust hurdles. Increasing consolidation has put nearly two-thirds of the nation's theaters in the hands of about a dozen operators, and consumer groups are concerned that consolidation will result in higher prices at the box office.
But all three chains are concentrated in different geographic markets. Act III is strong in the Pacific Northwest, while Regal is especially strong in the South and in medium-sized markets. United Artists is spread throughout 25 states.
Hollywood executives on Tuesday predicted that any attempt to significantly raise prices would be blunted in part because competition for the entertainment dollar is so broad now, including through such venues as themed restaurants and products such as home video and video games. If they don't want to pay box-office prices, moviegoers need only wait a few months before movies become available on video.
Investors like the growth of cinemas, the cash they generate and the relatively predictable profits. They also like the fact that Hollywood has been making more films than ever and spending record amounts to market those movies. The glut of movies has put exhibitors in a strong position to negotiate favorable terms with move distributors.
But some Hollywood executives say the current buyer's market for films from studios could end quickly should studios finally follow through with threats to trim production.
If Hollywood does begin churning out fewer films, they noted, the pendulum could swing seriously in the other direction, putting studios in a much better position to negotiate terms.
Although some speculated that the wave of mergers will give exhibitors more clout with studios, executives said demand by audiences to see particular movies still dictates the amounts theaters are willing to pay.
"We still sell picture by picture," one distribution executive said.
The two companies would pay about $31 a share for Regal and inherit about $290 million of the company's debt.
Regal's stock closed at $29.44 on Tuesday, down 81 cents in Nasdaq trading. The company has been on the rebound since the start of the year. Shares fell to about $22 late last year from a high of more than $36 in the summer.
Hicks Muse, based in Dallas, and New York's KKR would each own 45% of the new company, with the rest owned by the chain's managers and other investors. The company would carry $1.7 billion in debt.
Regal Chairman and Chief Executive Michael Campbell and his management team are expected to run the bulk of the merged operations. Hicks Muse and KKR each would contribute about $600 million of equity in the transaction.
KKR bought Act III from producer Norman Lear for $660 million last month. Hicks Muse in November agreed to buy United Artists for about $850 million.
The deal is expected to be completed by the middle of the year.
Bloomberg News was used in compiling this report.
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The Big Screens
The three-way deal among Hicks, Muse, Tate & Furst Inc., Kohlberg Kravis Roberts & Co. and Regal Cinemas Cos. would create the world's largest movie theater chain. The top five chains in number of screens, assuming the deal is completed:
Theater chain Headquarters No. of screens Hicks Muse/KKR/Regal Cinemas Knoxville, Tenn. 5,347 Carmike Cinemas Columbus, Ga. 2,720 Cineplex Odeon Toronto 2,600 AMC Entertainment Kansas City, Mo. 2,117 Cinemark USA Dallas 1,754
Theater chain No. of theaters Hicks Muse/KKR/Regal Cinemas 727 Carmike Cinemas 540 Cineplex Odeon 460 AMC Entertainment 226 Cinemark USA 193
Source: Company reports