In Arizona, Plans and Construction for New Movie Theaters

High growth in Southwest as movie theater companies expand

That comes on top of a 3% gain the year before. From 2000 to 2004, the number of theater screens around the nation actually declined. So did the number of movie facilities - from a peak of 7,744 in 1995 to just 5,939 last year.

John Fithian, president of the Theatre Owners group, thinks the tide has firmly turned. "The industry went through a period of retrenchment around the time of 9/11," he says. "But now we're building again. We expect to see strong positive growth in screen-count again in 2007 and beyond."

Tough movie critic

Willis Johnson, who started with a single-screen theater in suburban Chicago in 1978 and built his company, Tivoli Enterprises Inc., into a chain of a dozen facilities with 86 screens, has seen this expansion wave before and is worried.

In the late 1990s, he recalls, big national companies raced to put up the latest megaplexes. They built too many too fast, and were consumed by debt and lower-than-expected attendance that led to the demise and sale of such names as Lowe's and General Cinema. Now he sees a similar arms race to build and the prospect of another round of over-saturation.

"If you can find a good location that's underserved, then by all means go ahead and put up a theater. But there aren't many sites like that left now," Johnson says.

"There's a lot of money available to finance growth for these companies, but maybe there's too much money pushing for more growth than the market can stand."

Thus, the boom-and-bust cycle of movie theater development is bound to play out yet again. As usual, the well-capitalized operators with the best assets in prime locations will be most likely to weather the storm.

Wall Street plays major role

Some of the confidence exuded by movie theater chains today stems from rising revenues. U.S. box office receipts were up nearly 6% last year to $9.48 billion. Attendance rose 4% to 1.45 billion admissions. Those aren't all-time records, but they demonstrate that the advent of Netflix mail-order DVD rentals, downloadable movies off the Web and wide-screen home entertainment systems aren't going to put the neighborhood megaplex out of business anytime soon.

It's not just developers who have restored faith in movie chains. Wall Street is hungry to invest in the action, too. As of late April, both the industry's No. 2 chain, AMC Entertainment Inc. of Kansas City, Mo., and the No. 3, Cinemark Holdings Inc. of Plano, Texas, had filed prospectuses with the Securities & Exchange Commission to go public.

Cinemark, currently the owner of 203 movie houses with 2,477 screens, hoped to raise $400 million in its stock sale, while the larger AMC, owner of 411 theaters and 5,635 screens, set a goal of $750 million in its sale of shares.

The stock offerings come despite dour earnings. AMC has had nine straight years of losses, while Cinemark only returned to profitability last year after losing money in both 2004 and 2005. Cinemark had been owned since 2004 by the Chicago private equity firm Madison Dearborn Partners.

What will these companies - both of which trail publicly traded Regal Entertainment Group of Knoxville, Tenn., which has 539 theaters and 6,403 screens and a leading 17% share of the U.S. movie house market - do with the cash they raise? Some of it will be returned to investors but a sizable chunk is going to be poured into new development, too.

Cinemark, for instance, reveals in its offering documents that it is planning to erect 28 theaters with 418 screens in the U.S., ranging from markets such as Austin, Texas, and Reno, Nev., to Napa, Calif., and Valparaiso, Ind. It will put up another eight screens offshore in countries like Brazil and Taiwan.

Healthy ticket sales

Ongoing consolidation also is continuing as the biggest chains gobble up smaller rivals. In October, Cinemark paid over $1 billion for Century Theaters Inc. of San Rafael, Calif. Eric Handler, an analyst at Lehman Brothers in New York, says that Regal has earmarked an additional $300 million for future acquisitions.

Handler projects a 6% rise in U.S. box-office receipts overall this year as surefire hits such as "Spider-Man 3" and "Shrek the Third" draw big crowds. "A bullish outlook for the upcoming summer film slate continues to reinforce our belief in the exhibition industry's cyclical upswing," Handler says.