Tom Stephenson is chief executive of the Rave theater chain, which now operates… (Allison V. Smith / Los Angeles…)
A decade ago, Tom Stephenson opened a 16-screen theater in Montgomery, Ala., with a brash plan: build a national chain from scratch, one that would siphon business from the major circuits by offering the latest amenities in stadium seating, digital sound, silver-screen-size broadcasts of sporting events and opera.
Stephenson recently took a big step toward reaching his goal when his Dallas-based Rave Cinemas emerged as the unlikely buyer of as many as 35 theaters owned by National Amusements Inc., the theater circuit owned by media mogul Sumner Redstone's family.
For Redstone and his daughter, Shari, who runs the chain, the deal helped pay down the company's debt.
For Stephenson, the deal catapults him from a second-tier operator into the big leagues of national theater chains. Rave is now the No. 5 circuit in the country, operating 65 theaters and about 1,000 screens in 20 states, more than doubling its size.
At a time when movie theaters are no longer considered a high-growth business, Stephenson is making a contrarian bet -- at least in the midterm -- that people will continue to trek to theaters for a movie rather than nesting at home and watching it on their big-screen, high-definition TVs.
"If you can buy attractive theaters today at reasonable prices, you have a chance to create a lot of value over the next three years," Stephenson said. "We see terrific upside in this business."
He may be on to something. Movie theater attendance, which peaked in 2002 and remains close to what it was a decade ago, had a surprising uptick last year as filmgoers flocked to the multiplex to see 3-D blockbusters such as "Avatar" and "Up." The number of people in the U.S. and Canada purchasing tickets popped up 6% in 2009 and sales -- helped by higher prices for 3-D films -- reached a new record, climbing to $10.6 billion.
"It's probably a decent time to make an acquisition given . . . the potential of digital [technology] and the durability of the business," said Matthew Harrigan, a media industry analyst at Wunderlich Securities.
Others agree. Stephenson assembled a group of investors to bankroll Rave. His principal financial backer is TowerBrook Capital Partners, a New York investment firm that owns the alcoholic beverage superstore BevMo. Other investors include veteran theater executive Charles B. Moss Jr. and Lambert Media Group, an investment firm headed by former Fox TV executive Michael Lambert.
"I was just so impressed with [Stephenson's] aggressive and innovative approach to what has largely been a sleepy sector of the media mix," Lambert said.
Stephenson declined to disclose most financial details of Rave's operations but said ticket sales at the company's theaters totaled nearly $300 million last year, up from $84 million in 2005.
Rave's acquisition of the National Amusements theaters marks the latest consolidation in the exhibition industry, following AMC Entertainment Inc.'s purchase of Loews Cineplex Entertainment in 2006 and Regal Entertainment Group's acquisition of Consolidated Theatres in 2008.
But more recently the market for movie theaters has slowed. The credit crunch dried up financing for interested buyers. Potential backers viewed the business as a mature one. And major circuits were cautious about repeating the mistake in the 1990s of over-building that led to a glut of screens located too close to one another.
All that is behind now, Stephenson believes. Theater operators such as Rave are poised to benefit from the trend toward 3-D movies, he said, noting that his chain was among the first to outfit all its theaters with digital technology that made 3-D projection possible long before it became Hollywood's newest fad. Stephenson has openly needled his colleagues at trade shows for being slow to embrace the new digital technology, which eliminates the costly process of developing and distributing film prints.
"They converted fully and immediately and they were the first to do so," said Bud Mayo, chairman and chief executive of Cinedigm Digital Cinema Corp., the Morristown, N.J., company that supplied the digital equipment to Rave and helped finance its digital conversion. "It was really a milestone."
The 55-year-old, Nashville-raised Stephenson flirted with a political career -- he worked as a campaign director for Howard Baker, the Republican former Senate majority leader from Tennessee -- before pursuing his MBA at the University of Virginia and afterward working at Merrill Lynch.
Rave actually represents Stephenson's second move into the exhibition business. The first time didn't go so well. In 1995, he left a real estate investment company he founded to run Hollywood Theaters, a regional circuit based in Dallas. The chain expanded rapidly over the next several years. But heavy debt and competition from larger operators forced the company's sale in 1999 to avoid bankruptcy.
Undeterred, Stephenson launched Rave in 1999, taking into account the lessons learned from his former company.