Philip Anschutz follows a simple investment philosophy: invest in a company with the intent of changing its industry, of finding new ways to make old assets more profitable.
He followed that credo in creating Qwest Communications, which used old railroad rights of way to create what at the time was a leading-edge developer of fiber-optic communications networks.
Now he plans a similar overhaul in the movie business.
The Denver billionaire wants to reshape American entertainment by changing moviegoers’ experience at the theater. He sees a world where early arrivals at the theater watch commercials tailored for the big screen. Theater seats get filled on weekdays for events other than movies. And theater patrons get a wider choice of family fare.
To do all that, the 63-year-old Anschutz has assembled the world’s largest theater chain – Regal Entertainment Group – and two movie studios focused on churning out family-oriented movies.
While not directly linked, each plays a role in making Anschutz a powerful player in the entertainment industry. He is Show Business’ newest man behind the curtain.
“What we’re trying to do is redefine what a motion-picture company is,” said Kurt Hall, co-chief executive of Regal Entertainment Group, which has headquarters in Arapahoe County and Knoxville, Tenn.
The notoriously publicity-shy Anschutz declined to comment for this story.
He owns slightly more than half of Regal, the largest U.S. theater chain with 6,061 screens. (Regal operates 14 theaters in Colorado offering a total of 118 screens.) The centerpiece of Anschutz’s entertainment empire, Regal’s screens display movies, concerts, sports events and advertising. Regal distributes the latter three to its theaters over its national, digital network.
Wall Street’s reaction to the formation of this empire has been tepid. Regal’s stock has hovered in the low $20s and high teens for the 18 months since Anschutz cobbled Regal together from bankrupt theater chains. Meanwhile, the company carries little debt because of its bankruptcy cleansing. And Regal generates loads of cash, which it uses for acquisitions or massive dividends.
“They’re in perfect financial condition,” said Leland Westerfield, a media analyst with Jefferies & Co. in New York, who rates Regal shares “hold” and owns none.
Anschutz’s forays into new industries are not guaranteed for success. Regal’s past 18 months do not a dynasty make. Plus, No. 2 theater chain AMC and No. 4 Loews Cineplex reportedly are in merger talks, which could give Regal a competitor of comparable size and clout.
At this point, Regal’s success is as critical to Anschutz as that of Qwest, the Denver-based phone company of which he owns 17 percent. Anschutz’s majority share of Regal is valued at roughly
$1.5 billion, while his Qwest stake measures about $1.1 billion.
Anschutz’s rise as a media mogul will hinge on the results produced by Regal’s theater operations, its CineMedia advertising-and-promotions arm, and his two studios, Walden Media and Crusader Films. Each presents advantages and challenges.
Regal Cinemas
Anschutz, who made his fortune in oil, railroads and real estate, entered the movie-theater industry as an opportunist.
Since the late ’90s, much of the industry labored under crushing debt incurred to finance the construction of massive, stadium-seating theaters. Theater chains put too many “megaplexes” in a given market, choking off each other’s business.
Several chains succumbed to bankruptcy, including United Artists, the original Regal, Edwards Theatres and most recently, Loews.
Anschutz, seeing a stable industry that had overextended itself, played the role of well-heeled bottom feeder from 2000 to 2002. He spent less than $500 million buying the cheap debt of United Artists, Regal and Edwards, which put him in control when each filed for Chapter 11 bankruptcy protection.
Anschutz combined them all, later adding the Hoyts chain, and renamed the colossal chain after the largest of his quarry, Regal. Today, the original Regal’s modest headquarters in Knoxville serve as the command post for the new chain’s theater operations.
Anschutz kept Michael Campbell, the CEO of the original Regal, as head of the new chain’s theaters.
“The good news today is that the industry is essentially rebuilt,” said Campbell, who founded the original Regal when he bought a two-screen theater in Titusville, Fla., in 1989. “There’s a little bit of (new) building going on.”
The bankruptcy process allowed each of Regal’s components to shed billions of dollars in debt and break leases for weak theaters.
The primary advantages of combining all the chains came not in negotiating with film distributors, but in the exposure Regal could offer advertisers and the discounts it gained buying concession
supplies. Campbell estimates Regal saves $35 million annually through its greater clout in buying the cups, popcorn bags and janitorial services used by the 250 million patrons that enter its theaters each year.
With Regal’s operations tidied up, Campbell can tackle other obstacles.
First, Campbell does not consider a potential AMC-Loews merger to
be a threat. Others share that view.
“Consolidation of large competitors ironically might help Regal by accelerating the closing of deadwood, weak theaters and improving the cinema industry,” said Westerfield, the Jefferies & Co. analyst.
Second, what does Regal do with the cash its theaters generate?
Without a solid acquisition candidate this year, Regal issued a whopping special dividend of $5.05 per share, bringing Anschutz roughly $372 million. A Loews-AMC merger might spur Regal to steer its cash toward acquisitions instead of further huge payouts.
Third, Regal made the unusual move this fall of removing violent and explicit video games from its lobbies. Campbell said the decision came from Regal’s management rather than Anschutz, who carries a reputation for promoting family values.
Regal can keep minors out of theaters showing R-rated films, but it can’t keep them from playing the games. The financial hit Regal will take for the decision “can be minor,” Campbell said.
Finally, there’s the debate between theater chains and studios over which side will bear the cost of outfitting theaters for digital projection. With films increasingly carrying more digital content, some studios want digital projection to better showcase that content. What’s more, digital production and distribution can be cheaper for studios than traditional cellophane filming and truck distribution.
Yet the cost of installing digital projectors in theaters will be high, perhaps $150,000 per screen. So far, no more than 100 of the country’s 35,000 theater screens can deliver a digital flick.
Campbell proposes that studios bear most of the cost for the equipment because they reap most of the savings. He sees little additional revenue for theaters from digital.
“We believe our customers won’t be willing to pay any more for a digital picture than they would a regular picture,” Campbell said.
With the digital revolution on the shelf, Regal is mining opportunities that deliver revenue.
CineMedia
Most of the task of fulfilling Anschutz’s charter of finding new, profitable uses for old assets falls on Regal’s ads-and-promotions arm, Regal CineMedia.
Thus, the goal of Hall, who is also CineMedia’s CEO, is to put more fannies in the seats during the weekdays and to display theater-tailored commercials before advertised show times.
To better use the theaters on weeknights, Regal hosts live screenings of concerts by bands such as Coldplay and Linkin Park at one theater in each market on a given night. The chain plans to do
the same with sports events and business seminars.
For the second part of the strategy, Regal crafted a series of commercials that runs 20 minutes before each movie’s show time. The ads – mostly for military enrollment, cars, DVDs, video games and cable programs – often are longer or otherwise different from those seen on television.
Regal hears some complaints from patrons about the commercials, but most do not mind after they are told the ads stop at the movie’s advertised show time.
“Are we always going to be able to please everybody? No,” Hall said. “But I think we’re making significant progress … in educating the customer as to how this is going to work and that it
is a part of the moviegoing experience.”
In addition to the in-theater commercials, Regal shows a continual lineup of videos and movie previews on flat-panel displays in its lobbies.
Regal CineMedia’s efforts account for less than 6 percent of the company’s revenue. Yet that contribution, which also brings high profit margins, provides the small boost needed to set Regal apart from its peers.
“The revenue for on-screen advertising will grow rapidly for Regal with its digital network,” analyst Westerfield said. “The rest of the cinema industry trails CineMedia by one to three years.”
Hall, formerly CEO of United Artists, concedes that not all of Regal CineMedia efforts will deliver a big impact. But the chain’s largest shareholder has no interest in maintaining the status quo.
“Regal CineMedia’s charge, really, is to be an incubator of new ideas,” Hall said. “Some will work out, and some won’t.”
