Spent Force

Monday 5th February 2001

You might think it odd that at the annual general meeting of a company whose share price has slumped from $1.03 a year ago to around 24 cents, shareholder concerns were focused on when their free movie passes expired and whether they would get sneak previews of next year's blockbusters. But that seemed to be the case at cinema operator and property company Force Corporation's latest annual meeting. Think again, and maybe it's not so odd after all. With a $7 million loss this financial year pushing dividends down to 1 cent a share, a couple of free movie passes begins to look like good value for your investment.

But shareholders in the once market darling might have done better to indulge in a bit of board-roasting, or even some soul-searching at the annual meeting. Why, they might well have asked, has there not been more pressure to break the incestuous management structure whereby majority (50.2%) shareholder Peter Francis is both chairman and chief executive? And why, until late last year when 15% shareholder Shamrock finally pushed Mike McConnell onto the board, had there been no truly independent directors, instead the board being filled by a collection of Francis's close friends?

Neither McConnell nor Francis were talking to journalists as Unlimited went to press, but there was a tad of good news to turn what Francis called Force Corporation's annus horribilis into just a bummer of a year. Just before Christmas the company won the fourth stage of its ongoing battle with MTM Entertainment Trust in Australia over whether MTM can back out of an agreement to buy Force's Auckland-based Entertainment Centre. The ruling makes it slightly more likely that Force will actually get to sell the $65 million millstone round its neck and repay the $50 million loan advanced by MTM.

Resolving the legal wrangle over the seemingly jinxed entertainment centre (the tragic death of a teenager last year was the most human disaster of several) is pivotal to lifting Force's fortunes this year, says Ord Minnett head of research Arthur Lim. Lim is one of the few analysts now bothering to keep Force on their radar screen, or at least prepared to admit to doing so. If Force loses its legal battle and the sale falls through, the company will be left indebted to the tune of $93.4 million, with restrained movie income and a fair chunk of its balance sheet tied up in property in a depressed market.

Even if it does sell the complex - which includes 12 cinemas, an Imax theatre, Borders book store and Planet Hollywood restaurant (in which Force is a reluctant 80% shareholder due to lack of local investor interest) - analysts agree that the core company has little opportunity for growth in New Zealand's mature cinema business. National box office takings in the six months ending December were down 13.6% on the year before. Auckland suburban cinema takings fell 15% on the back of a substantial rise in Queen St cinema revenue. Worldwide, cinema admissions have fallen behind growth in the number of screens.

Force's cinema investments in Argentina and Fiji have also proved disappointing. Return on capital for its Argentinean joint venture is a less-than-satisfactory 2.5%, and plans to sell Argentinean real estate to repay debt are being stymied by a depressed property market. In Australia, the collapse of the Cinema Plus group saw Force write off $3 million on its investment and pick up the Imax business in Auckland.

Force's financial situation looks pretty dire, even without the aborted sale. During the last financial year, debt rose an additional $21.5 million to $93.4 million. Losing the dispute with MTM would have increased the end-of-year deficit from just under $7 million to $7.82 million, according to the annual report. The full-year loss for the 1999-2000 financial year followed a $7.8 million profit the year before and included a $10 million property write-down, close to $500,000 spent on professional fees for failed mergers with Hoyts and Village and then Ihug, and a total of $1.35 million on Planet Hollywood's operations and start-up costs.

Long-term shareholders looking at a share price of 25 cents in early January will remember with some ruefulness that before they approved the construction of the entertainment centre at the 1997 annual meeting, Force was in a strong financial position. It had positive operating cash flows of $9 million, total assets of $70.2 million, shareholder funds of $57.4 million and only $6.3 million of debt. Now, it is left trying to sell an entertainment centre that cost $75 million to build, including tenant inducements (as opposed to an original estimate of $60 million), but is probably now worth nearer $65 million (Force has already written down $10 million of the cost). If it fails to sell the centre, its $157.3 million total assets and current shareholder funds of $51.4 million mean it will face more restrictive terms when it goes to refinance its $50 million-plus capitalised loan.

The entertainment centre must go. But will MTM buy it? The story so far is that MTM Entertainment Trust agreed to buy the centre in June 1998, with the final sale price to be determined by independent valuation. It lent Force $50 million for the development, on the understanding the loan would come out of the sale price. But faced with its own troubled investments, MTM tried to pull out of the deal early last year. It claimed the centre had not been completed as required at the end of 1999, so the contract was void. It wants its $50 million back. Force argues that based on its set of architectural drawings the completion was on time, so the deal should go ahead. MTM argues it had a different set of drawings, which meant the deadline hadn't been met. The pre-Christmas court ruling supported Force, but even if that judgement isn't appealed, the company still has to wait for an independent decision on whether practical completion occurred in December (as Force says) or January (as MTM upholds).

It's hard to know what impact new investor Shamrock, and its new board member McConnell, will have on Force's fortunes. Shamrock, a Disney-related American investment company, paid just over $14 million - 62 cents a share - for a 15% stake in July last year, becoming the company's second largest shareholder.

McConnell was reluctant to be interviewed at this stage. "Clearly, I have a number of ideas" on what needs to be done to reverse the company's fortunes, he says.

In the meantime, Force directors are hoping a stronger movie line-up, including New Zealand-filmed big-budget Vertical Limit and the Lord of the Rings trilogy, will boost revenues this year. If not, and if the MTM sale doesn't go through, shareholders may find their precious movie passes even more valuable next year.

fiona_rotherham@idg.co.nz

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