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DEALTALK-Vue presents Cinema Buyout III: Will it be a hit?
September 23, 2010 / 11:01 AM / in 7 years

DEALTALK-Vue presents Cinema Buyout III: Will it be a hit?

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* New backers sought for British cinema chain Vue

* Permira, KKR, at least four other firms said to eye bids

* Bidders must weigh chances for Britain, overseas growth

* Part-owner and chief executive Tim Richards to stay

* Vue rivals Guy Hands’s Odeon, Blackstone-backed Cineworld

By Quentin Webb and Simon Meads

LONDON, Sept 23 (Reuters) - Like film studios, buyout shops seem fond of sequels.

The latest sees Vue seeking fresh private equity backers in a deal set to value Britain’s third-biggest cinema chain at 400 million pounds ($627 million) or more.

While at least six firms are circling, Vue chief executive Tim Richards will need to tell a gripping story about growth in a competitive and consolidated market.

Execution Noble analyst Geetanjali Sharma said any investor faced perhaps two years of “relatively muted growth and returns” in a fairly mature market. But the transfer to digital, and the chance to open new multiplexes in leisure parks, offered longer-term promise, she said.

Private equity dominates British cinema. Guy Hands’s Terra Firma [TERA.UL] owns top player Odeon and Blackstone-backed (BX.N) Cineworld Group (CINE.L) is in second place.

Buyout firms’ longstanding affection for the silver screen rests on the industry’s power to generate cash and its seeming imperviousness to recession.

Barring 2002, last year was the best for cinema-going in Britain since 1971, the era of “Love Story” and “Airport”.

But there have been horror stories too: Under KKR and Hicks, Muse, Tate & Furst, top U.S. chain Regal over-expanded, went bust, and ended up in the hands of sports mogul Philip Anschutz.

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BIDDERS

People familiar with the matter say Advent International, Bridgepoint Capital [BRDG.UL], Doughty Hanson & Co [DOUHA.UL], an apparently unscarred KKR and Co (KKR.N), Permira [PERM.UL], and TPG [TPG.UL] are all preparing bids. Others, including 3i Group (III.L), have decided against bidding.

Consolidation with Odeon or Cineworld could pose competition problems. The mergers that created both led to forced sales, creating a smaller rival in Empire Cinemas.

Cineworld, at least, is not contemplating any tie-up, some of the people said.

UBS is handling the auction and, some of the people said, arranging a financing package alongside Vue’s existing lenders. Preliminary bids are due around the end of the month.

The auction is the latest secondary buyout, a trend that irks some private-equity investors. [ID:nLDE6860PW]

This will effectively be the third set of investors to work alongside a Vue management team, led by Richards and his finance chief Alan McNair, that owns just more than half the company and will retain a stake.

It was first backed by Legal & General’s buyout arm, and now by Coller Capital, which took a 29 percent stake when it took over Bank of Scotland’s unlamented Integrated Finance portfolio, and hedge fund Och-Ziff (OZM.N) which owns a fifth.

HOLLYWOOD MISTAKES

Vue could have an enterprise value of 400-500 million pounds, according to reports.

That equates to about 6.6-8.3 times 2010 earnings before interest, tax, depreciation and amortisation (EBITDA), if Vue can grow at the same rate as in 2009 when EBITDA hit 51.5 million pounds. Cineworld trades at about 7.3 times trailing earnings, Starmine data showed.

The question is where Vue goes next. Britain’s big three are already busy up-selling viewers into plusher seats and 3-D screenings, and honing customer-loyalty schemes.

Meanwhile, a rapid roll-out of digital screens, bankrolled partly by studios grateful to cut distribution costs, allows theatres to be more flexible about movies they screen and to branch out into showing soccer matches or opera.

One option would be to follow Odeon’s lead into Europe: the group operates in six countries, owning more screens than anyone else in Italy and Spain.

Britain’s two dozen-plus mothballed leisure parks, when finally built, could also yield new sites for multiplexes, Altium Securities analyst Wayne Brown said.

Still, two of the biggest variables are completely outside investor control: British weather and Hollywood storylines.

“Ultimately we are movie-driven and Hollywood does not always get it right,” Richards told an interviewer earlier this year. “We operate in a narrow band, and the difference between an incredible year and a horrible year is not great.” (Editing by Dan Lalor) ($1 = 0.6382 pound)

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