General Cinema Corporation

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General Cinema Corporation

27 Boylston Street
Chestnut Hill, Massachusetts 02167
U.S.A.
(617) 232-8200

Public Company
Incorporated: 1950 as Mid-West Drive-In Theatres, Inc.
Employees: 13,000
Sales: $1.069 billion
Market value: $1.604 billion
Stock Index: New York

General Cinema is regarded by many Wall Street analysts as an investment firm; it has interests in radio and television stations, clothing stores, and real estate. Yet the company’s diverse holdings and overall financial success are founded upon, and closely tied to, the public’s consumption of carbonated beverages and attendance at movie theatres. General Cinema is presently America’s largest independent bottler of soft drinks and its biggest operator of multi-screen theatres.

Originally part of a corporation established in 1939, Mid-West Drive-in Theatres was entirely independent by 1950. Small in size at first, under the management of Philip Smith the company created 53 drive-in theatres throughout the United States, all of which were modestly profitable. Evolving demographic and sociological conditions in America, however, changed the direction of his company forever.

Smith was well aware of the fact that box office receipts in large urban movie houses were dwindling rapidly because of the rise of television and a reluctance on the part of suburban dwellers to travel into the city for entertainment. Throughout the 1950’s population growth in the cities of America had been predominantly in their suburbs. More people lived farther from the central city, and its movie houses, than ever before. In the late 1940’s, 90 million Americans viewed a film every week; the money they spent amounted to $1.7 billion in 1948. By 1958, the average weekly movie attendance was down to 39.6 million, and box office receipts had slipped below $1.2 billion.

Smith decided it was the perfect time to open a theatre in a newly constructed suburban shopping center—the suburban equivalent of “downtown”. The mall increasingly became the equivalent of a town square, the center for both shopping and entertainment, and business boomed for Mid-West. Indeed, the mutually beneficial relationship between retail stores and movie theatres was too promising for Mid-West’s competitors to resist; of the approximately 180 indoor theatres built in 1961 and 1962, onethird were in shopping malls.

Renamed General Cinema in 1964 to reflect the shifting focus of its operations, the firm continued to expand rapidly. It acquired the Mann Theatres Chain of Minneapolis for $6.6 million in cash and notes during 1970. Two years later, the company purchased an interest in 47 indoor theatres located in Louisiana and Florida from Loews Corporation for nearly $16 million.

Although General Cinema is well known for its extensive network of movie theatres, the soft drink industry is the one in which the company achieved its most impressive financial returns. In 1968 General Cinema began the gradual acquisition of beverages companies which eventually made it America’s largest independent bottler. General Cinema’s beverage division has exclusive franchise agreements with Pepsi-Cola Inc., Dr. Pepper Company, and the Seven-Up Company; the company has the right to produce and sell Pepsi-Cola, Diet Pepsi, Pepsi Light, regular and diet Pepsi Free, and Mountain Dew, in the District of Columbia and specific areas in California, Florida, Georgia, Indiana, and West Virginia.

More recently General Cinema’s market position in both the soft drink and entertainment industries has become less secure. There have been predictions by Wall Street analysts that income from the theatre business will decline because of the rise of cable television and video cassettes. Additionally, U.S. census statistics indicate a coming decline in the percentage of the population from 10 to 20 years of age, the age group that comprises 80% of all moviegoers. As well in April 1986 the company revealed that it was under investigation by the Federal Government for antitrust violations in its beverage business and ticket price-fixing in its theatre operations.

Despite these difficulties, General Cinema has an efficient and dependable management team upon which to rely. Richard A. Smith, who became chief executive officer of the company after the death of his father in 1961, has a reputation for hiring businessmen with proven talent for solving financial, legal, and managerial problems. Two of his most notable “finds” are Robert J. Tarr and J. Atwood Ives. Tarr, president and chief operating officer since 1985, arrived at the company in 1976 after a career as an investment banker at Paine Webber. Ives, chairman and chief financial officer since 1985, also joined the company after a stint at Paine Webber.

Lately, amid rumors of a change in leadership, Smith has denied that the appointments of Tarr and Ives signal the beginning of a competition for his job. What the appointments do signify, however, is Smith’s plan to change General Cinema’s reputation from that of being a one-man company to that of a company in which decisions are made collectively among the top executives. Yet Smith is finding it hard to downplay his own business acumen. According to one investor, “You’re not really betting on soft drinks or movies. You’re betting that Dick Smith is going to make another smart deal.”

In fact, Smith has done remarkably well. Fiscal 1985 marked the 12th consecutive year, and the 24th out of its 25 years as a public company, in which General Cinema posted record operating results. In the past few years, it has been the beverage division, rather than the theatre operation, that is the strongest cash generator; it has accounted for more than 70% of the company’s annual operating earnings. Walter Mack, present of Pepsico for many years, has made a number of insightful remarks on generating cash in the soft drink business: “Take a bottler whose plant and machinery cost him in the neighborhood of a million dollars. With any luck at all he’s probably making five million a year, so he’s getting his money back fives times over from now until doomsday. It’s a sweetheart business....” Keeping in mind that Mack’s figures are based on a company’s owning its bottling plants, one must conclude that profit must be potentially even greater for General Cinema, which leases rather than buys or builds it plants.

General Cinema’s forays into the larger marketplace have also proved rewarding. With its characteristic low profile, the company began purchasing stock in Heublein Inc. Attempting to thwart a perceived takeover by General Cinema, Heublein was finally forced to seek a higherpriced bid from another company. The result—Smith sold his holdings in Heublein for a significant profit. Clearly, the management of General Cinema knows when to be aggressive.

It also knows when to send mixed signals to the market — as in its pursuit of Carter Hawley Hale stores. Carter Hawley Hale is America’s tenth largest clothing retailer, with Bergdorf Goodman and Neiman Marcus under its control. In 1984 the Los Angeles-based firm found its market share eroding in the competitive environment of California, and was soon confronted with a unwanted takeover bid from a clothing store chain. Here was an opportunity for Smith to put into action his plan to “consider a major investment in another company, provided it is one with involvement.” By “investment with involvement” Smith meant that “after making a significant minority investment in a company, we would participate actively in strategic decisions but leave day-to-day responsibilities to operating management.” Carter Hawley Hale subsequently issued one million shares of preferred stock which General Cinema purchased for $300 million, providing it with a 37% interest in the company—the largest interest of any single shareholder.

General Cinema’s interest in Carter Hawley Hale caused Carter’s share value to increase dramatically, despite the fact that the company’s profits were well below what had been expected on Wall Street. Perhaps investors were expecting General Cinema to institute major operational changes at Carter Hawley Hale. They were mistaken. General Cinema signed an agreement with the company which will expire in 1991: General Cinema’s interest in Carter Hawley Hale is frozen, and restrictions have been placed on the sale of its stock.

In regard to both the Heublein and Carter Hawley Hale transactions, Smith insisted at first that he wanted to purchase the company, but he later admitted he was playing with stock instead. Smith recently revealed that, “At the moment, the investment activity is ahead of the operating activity,” and has made known to Wall Street investment bankers his intention to purchase another operating division in either consumer package goods or services. However, Smith is very selective. He has rejected opportunities to acquire Entenmann’s (a food products concern), Wm. Underwood (a theatre chain), and Wometco Enterprises (a Coca Cola bottler). In Smith’s estimation, each of these companies is overvalued.

The faith of investors in management’s ability to spot a potential moneymaker has given rise to the description of General Cinema as an “investment firm.” Yet, more than anything else, the company’s future depends on its success as a soft drink bottler and movie exhibitor. According to Smith, the beverage division is growing at a rapid pace, and the long-term effects of home videos on movie attendance will be negligible. If he is correct, General Cinema’s goal of increasing its earnings at a rate of five to ten percent above inflation is quite feasible.

Principle Subsidiaries

Airway Drive-In Theatre Co., Inc.; Beta One Leasing, Inc.; Cinema AD-Ventures, Inc.; Coral Television Corp.; Dazzle, Inc.; Dedham Cinema, Inc.; GCC Beverages, Inc.; GCC Beverages of Mass., Inc.; GCC-Communications, Inc.; GCC Films, Inc.; GCC Theatres, Inc.; Holiday General Corp.; Jersey Division Realty Corp.; Joliet Cinema, Inc.; Kokomo Cinema, Inc.; Laconia Theatre Corp.; Newport Plaza Cinema, Inc.; Pepsi-Cola Bottlers of Akron, Inc.; Route 42 Cinema, Inc.; Southdown Cinema Corp.; Super Video, Inc.; Timonium Concessions, Inc.; Timonium Drive-In Theatre Corp.; Bedford Mall Cinema, Inc.; College Square Cinema, Inc.; Des Moines Drive-in Theatre Co.; Hanover Mall Cinema, Inc.; Jarundale Cinema, Inc.; Lincoln Realty Corp.; Meyerland Cinema, Inc.; Nashua Mall Cinema, Inc.; Natick Auto Theatre Corp.; Polk Realty Corp.; Shoregate Cinema, Inc.; Westgate Brockton Cinema, Inc.; Southwest Bottlers of Florida, Inc.