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Edwards Chain Agrees to Anschutz Bailout

Theaters: Newport-based operator, the state's largest, is in bankruptcy. Rival Loews also files Chapter 11 for acquisition deal.

February 16, 2001|SALLIE HOFMEISTER and MARC BALLON | TIMES STAFF WRITERS

Edwards Theatres Circuit Inc., California's largest theater chain, agreed Thursday to be bailed out by billionaire Philip Anschutz and distressed debt specialist Oaktree Capital Management.

Newport Beach-based Edwards, which is in bankruptcy proceedings, said it has signed a letter of intent under which Anschutz Corp. and a fund managed by Oaktree will make a significant but undisclosed investment.

Terms of the proposed transaction were not disclosed. An Edwards spokesperson declined to say whether the Edwards family, which has operated the chain for 70 years, will maintain control of the company. Some analysts said that was unlikely.

Also Thursday, Loews Cineplex Entertainment Corp., the nation's second-largest and oldest theater chain, filed for Chapter 11 bankruptcy as part of an agreement to be acquired by an investment group that also includes Oaktree and former Michael Milken associate Gary Winnick's Pacific Capital Group Inc. Leading the group, which has agreed to make a $245-million equity infusion into Loews, is Canadian takeover specialist Gerry Schwartz, who controls Onex Corp., which already owns several theaters.

Loews Cineplex, which operates mostly in and around big U.S. and Canadian cities, said it plans to shut 22 of its 365 U.S. theaters immediately and 25 of its 114 Canadian theaters, and will shut at least 50 more in the future.

Edwards' President Stephen Coffey said in a statement that the capital infusion by Anschutz and Oaktree will enable the company to emerge from bankruptcy with a more efficient, competitive and financially sound operation.

No layoffs are expected as a result of the deal, Edwards spokeswoman Ann Julsen said. But experts said more theaters are likely to close. Edwards has already severed dozens of leases since it filed bankruptcy in August. Edwards runs 739, the bulk of them in California.

The Edwards transaction makes Anschutz, a Denver-based oil and railroad billionaire, the most powerful force in the theater business in this country. Last fall, Anschutz, who owns 18% of Qwest Communications, the telecommunications giant, seized a position in the debt of United Artists Theater Co. that could lead to control.

He also has been accumulating the debt in Knoxville, Tenn.-based Regal Cinemas, the nation's largest theater chain. Anschutz and Oaktree together hold $345 million of Regal's $1-billion debt, though sources said the current owners are fighting to retain control.

United owns 1,604 screens and Regal operates 4,361.

Though Anschutz was the earliest to recognize a potential in buying up the bonds of ailing theater chains, others are following suit--and are expected to drive up prices. Sources close to Winnick, the founder of telecommunications giant Global Crossing Ltd., said Loews is the first of several theater deals he's interested in doing.

Loews and Edwards are two of nine theater chains that have filed for bankruptcy protection recently, after financially overextending themselves by building new multiplexes. A construction spree has increased the number of movie screens from 28,000 in 1995 to roughly 37,000 in 1999--as many as 30% more than the market can bear, analysts said. Analysts have said more than one-quarter of the U.S. screens should be closed.

By buying up the bank debt of these troubled chains, opportunistic investors like Anschutz expect to nurse them back to health by renegotiating with creditors such as banks as well as their landlords, and shutting down antiquated outlets or those in poor locations.

Winnick and Anschutz own fiber-optics networks that could play a role in converting these outlets to digital cinemas, which would cut by $800 million a year the cost to studios for distributing movies. But sources close to the two investors say digital cinema is not a factor in their plans. The technology does not yet exist and the "last mile" of fiber to theaters would be prohibitively expensive.

"Digital distribution in the theatrical business eventually will come," said Brian McCarthy, managing director at Pacific Capital. "But what form it will come in and when is still a debate that is continuing." But he added: "If the industry ends up going in that direction, we know who to call."

Edwards President Stephen Coffey said he expects a definitive agreement to be completed within weeks. The agreement must be approved by the bankruptcy judge.

Analysts have estimated the value of the chain, which lost a reported $40 million in 1999, at nearly $300 million. Edwards owes $217 million to its largest creditor, a consortium of lenders headed by Bank of America. Neither B of A nor other creditors could be reached Thursday.

The Edwards chain was founded 70 years ago by James Edwards Sr.. When he died in 1997, son James Edwards III became head of the company. Other family members have also been involved in operating the company.

It is not clear what difference it would make to the chain under a new management team. Despite their current woes, family members have helpful, long-standing relationships with the movie theaters, said Gregory Stoffel, a consultant with Gregory Stoffel & Associates in Irvine.

"But, from an investment standpoint, having somebody come in new and fresh could be a real positive thing," he said.

Regardless, Stoffel said he expects that more theaters are likely to close. Edwards has already severed dozens of leases since it filed bankruptcy.

"They're all closing lots and lots of locations," Stoffel said of the large theater operators. In the first round of closures, exhibitors shut down movie houses with just a few screens. "They've gone through the first wave," he said. "Now they're closing down the six-, seven-, eight- and 10-screen cinemas that aren't doing so well."

Times staff writer Leslie Earnest contributed to this story.

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