US group close to sealing cinema deal

MATHEW HORSMAN

Barring last-minute hitches, a consortium led by US-based Reading has clinched a pounds 200m-plus deal to buy the 120 MGM cinemas put up for sale by the distressed French bank Credit Lyonnais.

Although a few issues have not been settled, including whether the chain will retain the MGM brand name, nearly all substantive matters have been resolved. "Lawyers are dotting i's and crossing t's," a source close to the auction said.

Reading and Richard Branson's Virgin Group, a minority shareholder in the consortium, plan to finance the deal largely through debt. The MGM cinema chain generates about pounds 25m cash a year - easily enough to fund a highly leveraged purchase, analysts suggested.

Credit Lyonnais, which last week entered into 30 days of exclusive negotiations with Reading, hopes to finalise the sale by July.

Leaving behind competing bidders Rank Odeon, Time Warner, Carlton Communications and two management-led groups, Reading has put together the "highest bid with the fewest strings attached", the source said.

Reading, 47 per cent-owned by Craig Corp, is an investment vehicle of Jim Cotter, a veteran of the US cinema business and former close associate of the mega-rich Forman family, owners of a leading US cinema chain.

One of the few senior Forman executives to have come from the outside, he helped the family build one of the largest private fortunes in the US.

Since he struck out on his own in the 1970s, Mr Cotter has used Reading, formerly the Reading Railway, as his prime investment vehicle. Last year, Reading hired the merchant bankers CS-First Boston to ferret out investment opportunities in the cinema exhibition market worldwide.

"They were looking to expand in the international cinema market," Christian Purslow, director of UK mergers and acquisitions at CS-First Boston, said. "The MGM holdings are without question an attractive proposition. It's not often that you have the chance to gain a significant foothold in a market in one move."

Reading made its first overseas investment last year in Puerto Rico, and is now looking at opportunities in Australia, Mr Purslow said.

Virgin Group was approached to join the Reading group earlier this year, and was attracted by the prospect of leveraging its brand name into cinema exhibition, which it views as a key Virgin market.

"We have plenty of experience retailing the Virgin name in the UK," a company insider said. The cinema business "is a natural for Virgin" given the demographics - 15 to 35 years old - of the prime cinema-going public, the source said.

Mr Cotter and his company have yet to decide whether to use the Virgin name in the UK. Reading is likely to request that the MGM name be kept for a period of time, and phased out later if a name change is deemed desirable.

Other bidders were believed to have been stymied by regulatory hurdles. Rank and Time Warner already have a strong presence in the UK cinema exhibition market and would have probably attracted scrutiny from the Office of Fair Trading if their bids had been accepted.

Reading has no UK interests, although it once owned cinemas in the Netherlands. Reading had hoped to buy MGM's Dutch chain as well, but was outbid by Chargeurs, the French industrial holding company.