Cineplex Odeon Corporation History

Address:

1303 Yonge Street
Toronto, Ontario M4T 2Y9
Canada

Telephone: (416) 323-6600
Fax: (416) 323-6677

Public Company
Incorporated: 1977 as Cineplex Corporation
Employees: 7,662
Sales: US$509.69 million (1996)
Stock Exchanges: Toronto New York
SICs: 7830 Services--Motion Picture Theaters

Company Perspectives:

In spite of our challenges, Cineplex Odeon remains the largest motion picture exhibitor in Canada in terms of number of screens, and the third largest in North America in terms of box office. We believe that we have built a solid foundation from which our Corporation will prosper as we move toward the future with optimism.

Company History:

Cineplex Odeon Corporation, with headquarters in Toronto, is one of the largest motion picture theater circuits in North America. The company operates high-quality theaters in most metropolitan areas in the United States and all of the primary urban markets in Canada. In 1997, Cineplex had 1,543 screens in 315 locations in North America.

Modest Beginnings

Cineplex Odeon commenced operations in 1979 when Garth Drabinsky, an energetic young Toronto entertainment lawyer, persuaded Nathan A. Taylor, a veteran of the motion picture exhibition business, to provide C$1 million (US$840,000) to purchase space in the basement of Toronto's Eaton Centre shopping complex. Drabinsky had first impressed Taylor several years earlier when, as a law student, he had asked the theater circuit manager to invest in a free film magazine he was distributing. Taylor refused, but he offered Drabinsky a position as editor of his own film industry paper Canadian Film Digest, a job Drabinsky accepted. Although Taylor had pioneered the idea of multi-theater locations as early as 1948, the new site, with 18 screening rooms, was much more ambitious than anything he had previously built. In order to distinguish the Eaton Centre location, Taylor coined the name Cineplex, an abbreviation of "cinema complex," and the company was born.

From the beginning, Drabinsky was the driving force behind Cineplex's development into the second-largest theater chain in North America. He adopted a two-pronged approach that involved both the restoration of dignified old theaters and the introduction of small theaters in such locations as shopping malls. This combination of luxury and variety changed the movie-going experience and halted the decline in movie attendance that had become pronounced in the 1970s.

Nevertheless, the operation had modest beginnings. When the Eaton Centre multiplex first opened its doors, major distribution circuits controlled access to most of the expensive first-run films. Small, independent distributors, such as Cineplex, were left with less popular first-runs and second-run films that had already been playing for some time. Cineplex was also committed to showing foreign-language and independent art films with a small but loyal audience. For this reason, competitors failed to take the operation seriously at first. The consensus in the industry was that Drabinsky and Taylor would be lucky to last six months.

Cineplex confounded the experts by earning C$50,000 (US$42,000) a week during its first three years of operation. During this period, the multiplex gradually began to attract the attention of outside investors who wanted to duplicate the formula in other locations. However, in spite of its impressive performance, Cineplex was encumbered with substantial loans from the Toronto Dominion Bank and the Claridge Corporation, a Montreal development company headed by Charles Bronfman. In 1982, attendance at the Cineplex theaters dropped dramatically, and creditors threatened to call in their high-interest loans. In a bold move to avoid bankruptcy, Drabinsky flew to Montreal and persuaded The Bronfman Group to buy a large stake in the company. Cineplex went public on the Toronto Stock Exchange in October 1982, and began trading on the New York Stock Exchange in 1987.

Meanwhile, Drabinsky was tackling the problem of first-run distribution malpractice in a typically forthright way. He went to the Combines Investigation Branch, a Canadian federal investigative body, with documents proving that competitors such as Canadian Odeon Theatres and Famous Players had enjoyed preferential distribution agreements with the major U.S. film companies for several decades. The Canadian government threatened to take the exhibitors and the film companies to court, but a settlement was reached allowing Cineplex and other small chains to bid for first-run films on an individual basis. The settlement was widely viewed as a victory for Cineplex. Shortly afterward, using capital generated by The Bronfman Group collaboration, Taylor and Drabinsky bought the 297 screens of Canadian Odeon Theatres for a modest C$16 million (US$13.4 million) and in June 1985 changed the company name to the Cineplex Odeon Corporation.

Expansion in the 1980s

From the beginning, Cineplex pursued a strategy of expansion into key markets, notably the United States, where the Los Angeles Beverly Center 14-screen multiplex opened on July 15, 1982. The Beverly 14, a collection of small theaters in the middle of a shopping complex that offered free parking, generated revenues of US$4 million in the first year, almost twice the initial projections. This set the stage for a systematic penetration of the U.S. market, as Cineplex began to buy up both individual movie houses and theater chains. Los Angeles remained an important focus, and the company made a number of acquisitions throughout the city in the 1980s, culminating in the June 1987 opening of the 18-screen Cineplex Odeon Cinemas at Universal City.

In November 1985 Drabinsky purchased the debt-ridden Plitt Theatres, which increased his holdings by 574 screens in 21 states in the United States. The acquisition left Cineplex in a vulnerable financial position, forcing Drabinsky and vice-chairman Myron Gottlieb to look for a major financial backer. In December 1985, Drabinsky met with Lew Wasserman and Sidney Sheinberg, chair and president respectively of MCA, Inc. In January 1986, MCA announced that it had agreed to buy 49.7 percent of Cineplex for US$239 million. This injection of much-needed cash heralded a series of acquisitions of American theaters negotiated through the company's U.S. subsidiary, Plitt Theatres. Between April and December 1986 Cineplex purchased five movie theater chains, adding a total of 372 screens in 128 locations. In addition to these acquisitions, the company constructed 31 theaters with 163 screens in the United States and Canada during 1987. An additional 229 screens were opened in 1988. By 1989, Cineplex Odeon controlled 1,825 screens in 499 locations in North America. In order to offset the costs of the rapid expansion program, Drabinsky encouraged landlords of the new premises to invest in the company. He also adopted a practice of selling off individual properties if their real estate value increased dramatically. By constantly juggling his assets, and by the force of his confident and persuasive personality, Drabinsky managed to keep enough credit on hand to continue his policy of rapid growth, even as share prices fell in the wake of the October 1987 stock market crash. In 1988, the company moved into the United Kingdom, with the stated intention of "developing and operating" over 100 screens in the British Isles by the end of 1991. To do so, he increased the company's debt-load to over US$500 million, a level considered unacceptably high by many shareholders.

Drabinsky's ambitions went beyond operating a large number of screens. Determined to make theater-going a clean, civilized, and exciting experience, he established quality service and attractive locations as priorities in any operation that he took over. To this end, he spent millions of dollars refurbishing run-down theater complexes and in some cases painstakingly restoring historical landmarks to their former glory. Throughout the 1980s, every new acquisition was evaluated and refurbished by a 100-person design and construction team under the direction of Cineplex head architect David Mesbur. Cineplex undertook the restoration of cinemas on Vancouver's Granville Street, and the new complex quickly became one of the most profitable venues in Canada. According to company reports, the Gordon Theater in Los Angeles brought in a weekly revenue of US$6,000 before a US$650,000 facelift by the Cineplex design team. Renamed the Showcase, the refurbished cinema averaged US$30,000 a week. Art Deco motifs, plush seating, state-of-the-art sound equipment, and cappuccino bars revolutionized the way Americans thought of the cinema experience. Even Drabinsky's rivals admit that he forced the standard of service and appearance in the industry to rise. The luxurious surroundings, however, came at a high price: in May 1989 Forbes estimated that Cineplex spent approximately US$1,400 per leased seat compared to an industry average of US$500 a seat.

The cost of entertainment in a Cineplex theater was also high. In 1988, the average ticket price in the industry was US$4, compared with US$7 at Cineplex. The elevated prices occurred at a time when the number of movies going into production each year was dropping, and multiplexes were being forced to show first-releases on more than one screen in order to fill their playbills. Nevertheless, Drabinsky remained convinced that patrons would pay more for the opportunity to view in comfort.

They were also paying for the opportunity to snack in comfort. Concession stands in Cineplex theaters were among the most innovative in the industry, and included upscale cafes in selected locations that served cappuccino, herbal tea, and croissants. Even the more mundane establishments offered real butter on their popcorn, an executive decision that cost Cineplex a great deal of money over the years. Since concession revenues accounted for approximately one-third of overall box office revenue at Cineplex locations in 1989, the effort was judged worthwhile. Cineplex also invested considerable sums in its supervisors, most of whom participated in a six-week in-house management training program.

In view of Drabinsky's celebrated attempts to restore glamour to the movie-going experience, competitors were surprised when he introduced on-screen advertising to his Canadian venues in 1985. At a time when theaters were losing audiences to video and cable television, commercial-free screening seemed one of the movie industry's most important attractions. Drabinsky defended his decision in pragmatic terms, pointing out that the timeliness of a movie's release surpassed in importance the presence of advertising. Disgruntled patrons publicly took issue with this viewpoint, in some cases throwing objects at the screen when a commercial aired. Drabinsky refused to withdraw advertising from all but 26 art-house venues in Canada, but the experience may have influenced his decision to introduce advertising to his United States screens on a more limited basis.

Diversification in the Late 1980s

Not content with celluloid success, Drabinsky soon turned his attention to live theater. In 1986, Cineplex acquired the lease to half of the Imperial Theatre in downtown Toronto. The building had an illustrious history dating back to 1920 when it opened with a combination of vaudeville and silent movies. For many years, the other half of the building had been leased by Famous Players, one of Cineplex's biggest rivals on the Canadian circuit. Cineplex acquired the lease to the second half of the building in 1986 but due to legal wrangles was not able to begin restoration of the theater until 1989, when it purchased half of the building outright. Renamed the Pantages, the property was gutted in a make-over that restored the theater to the original design of architect Thomas Lamb at the cost of US$18 million. Drabinsky then bought exclusive Canadian rights to Andrew Lloyd Webber's musical Phantom of the Opera, which premiered to record box office advance sales in late 1989. The production was the most expensive ever staged in Canada. The company became involved in other theatrical projects during this period, including a North American tour of songs and music by Lloyd Webber. The program of diversification was completed with the purchase of the Film House group, a post-production facility, in 1986, and the financing of films by Oliver Stone and John Schlesinger in the United States.

Meanwhile, MCA and The Bronfman Group, Cineplex's major shareholders, were becoming increasingly concerned about the level of debt that the company had accumulated. By 1988, properties were being sold to raise money. In 1989, Cineplex's 50 percent interest in Universal Studios Florida was sold to the Rank Organisation in the United Kingdom. In early 1989, the Bronfmans indicated that they wanted to sell their 30 percent voting interest in Cineplex. Drabinsky and chief administrative officer Gottlieb recognized an opportunity to gain control of the company by acquiring The Bronfman Group's 30 percent interest. Although MCA owned 49.7 percent of the company, Canadian law allowed it only 33 percent of the voting rights. MCA president Sidney Sheinberg responded by asking that an investigation be made into Cineplex's irregular accounting practices, long a source of concern to investors. Financial improprieties were uncovered, and by the end of 1989 Cineplex's apparently healthy profit had been recalculated as a US$78.6 million loss. Drabinsky and Gottlieb were unable to secure sufficient financing to close their deal, and in December 1989 the era of Cineplex's wild leveraged expansion came to an end when both men were forced out of the company. They later purchased the Pantages theater and rights to The Phantom of the Opera. Cineplex, meanwhile, was left with a US$600 million debt.

Cost-Cutting in the 1990s

In a letter to shareholders dated April 1991, Leo Kolber and Allen Karp, Cineplex's new chairman and chief executive officer respectively, stated that whereas before 1989 the company had attempted to create "an entertainment conglomerate with a presence in many aspects of the industry," the focus in the 1990s would be "the business we know best--motion picture exhibition." In keeping with this philosophy, the company entered the 1990s by selling most of its peripheral assets, including the live entertainment division, a residual interest in Universal Studio Florida, the Film House post-production facility, the theaters in the United Kingdom, and a number of unprofitable United States screens. Plans to buy new theaters proceeded at a modest pace, and the full-time design team was reduced from 100 people to fewer than ten. The new management recognized that it would be several years before their cost-cutting efforts would be rewarded, but already in 1991 they could claim that their "fire-fighting" phase was over.

The company continued to focus on motion picture exhibition and pursued only modest expansion for the next few years. This strategy, combined with the company's cost cutting, brought Cineplex back to profitability in 1993. MCA, the company's major stockholder, also helped boost revenues that year. It's studio, Universal Pictures, was Cineplex's major supplier, and its 1993 blockbuster Jurassic Park made money for the movie exhibitor.

Although the relationship was beneficial in 1993, the next year Universal Pictures' lack of hits dragged Cineplex down. With hits from Disney and Paramount, the industry enjoyed box office revenue growth of 4.7 percent, but Cineplex was restricted by its ties to Universal and saw revenues drop 1.3 percent.

In 1995 Cineplex Odeon announced a merger in the works with Cinemark USA, which would have created the largest motion picture exhibitor in the world. The proposed $445 million deal never materialized, however, and Cineplex pursued expansion with limited new screen openings. The company's ownership structure did change slightly in 1995, however. That year Seagram Co. bought 80 percent of MCA from Matsushita Electric Industrial Co. Seagram's majority shareholders, the Bronfman family, also owned 24 percent of Cineplex. With Seagram's acquisition of MCA, the Bronfmans gained a controlling interest in Cineplex.

Multiplexing in the Late 1990s

The following year MCA and the Bronfmans invested US$50 million into Cineplex. The much-needed capital helped Cineplex construct more multiscreen theaters. Multiplexing, or constructing many screens in one theater, became a popular strategy in the mid-1990s for creating economies of scale for movie exhibitors. With one ticket taker and one concessionaire, a theater could serve patrons for a dozen or more screens. Multiplexes also tended to offer a wider range of concessions, such as espresso and pizza. Cineplex began a $145 million expansion plan that called for 200 new screens in Canada; the scheduled completion date was the end of 1998.

Multiplexing made way for megaplexing in the late 1990s. Hoping to attract more customers and keep them on-site and spending their money longer, exhibitors were not only raising the number of screens, they were also adding entertainment centers with such features as interactive video game rooms. Cineplex rival AMC Entertainment was building 24- to 30-screen theaters and surrounding them with bars, restaurants, book and music stores, and video game centers. AMC directly challenged Cineplex by building several of these megaplexes in major Canadian markets. Howard Lichtman, Cineplex Odeon's executive vice-president told Maclean's, "We're not afraid of competition."

Cineplex took a cautious approach with constructing megaplexes. It did build some, including sites at Universal Studios, Florida, and in the Latin Quarter of Quebec. However, it was wary of the effect a studio drought could have on a 30-screen complex and proceeded slowly. Still, the company moved forward with its expansion plans, adding 111 new screens in 1996 and then also closed or sold 84 old or unprofitable screens that year. Also during this time, the company expanded for the first time outside North America, opening six screens in Hungary in 1996.

Despite the optimism indicated by its expansion program, Cineplex Odeon saw net losses in 1995 and 1996 of $32 million and $31 million, respectively. Once again, Cineplex seemed to be hurt by the relatively poor performance of the movies from its suppliers. Industry-wide box office revenues rose 7.6 percent in 1996, to $5.9 billion, and Cineplex apparently did not reap the rewards of the industry's spectacular performance. The company attributed some of the poor showing to a six percent industry-wide increase in screens, which they regarded as watering down their returns, especially since most of Cineplex's new screens did not open until late in 1996.

In late 1997 Cineplex Odeon announced plans to merge with Sony's Loews Theatre Group. The proposed merger would create the largest motion picture exhibitor in North America, with $1 billion in sales and 2,600 screens in the United States alone. Early details of the deal indicated Sony would own 51 percent of the new company, Loews Cineplex Entertainment, and Cineplex's shareholders would hold the rest as follows: Seagram, 26 percent; the Bronfman family, 9.7 percent; all other Cineplex shareholders, 13.3 percent. Both Cineplex and Sony hoped their combined forces would help them expand overseas and compete with other rapidly consolidating exhibitors. Cineplex planned to complete the merger by mid-1998, despite opposition from consumer groups, who claimed the new company would violate anti-trust laws.

Principal Subsidiaries: Plitt Theatres, Inc.

Principal Divisions: Cineplex Odeon Theatres; RKO Century Warner Theatres; Walter Reade Theatres; Neighborhood Theatres; Washington Circle Theatres.

Cineplex Odeon Corporation History

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