KEY POINTS:
Sky City's short stint in the movie business looks likely to fade to red, not to black. Sky City paid top dollar for the expanding cinema business, but there are not many people who might buy it.
Company insiders say before last week's departure managing director Evan Davies
had accepted the end of his dream for the cinema arm to make Sky City a broad-based entertainment company. His exit has removed any lingering sentiment to keep its 69 screens, a 67 per cent stake in the 10 screens in Fiji and 25 per cent of Rialto Cinemas here.
Investors were relieved after the company's May 22 market update, when Sky City said it was looking at divesting companies not making an adequate return with "a particular focus on the the cinema business". But there will be widespread surprise if it profits from sales.
Sky City insiders and others in the business said the cinemas had been doing okay. But Sky City's poor rate of return on capital is due in large part to the high price that it paid for the chain.
The 2001 purchase of the Force Corporation, with cinema and property interests, and then Sky City Leisure gave it 50 per cent of a joint venture with Australian exhibition company Village. Sky City would not say how much it had paid but company insiders suggested it was more than $100 million, counting expansion such as the new cinema complex at Chartwell, Hamilton.
This time last year Sky City bought out Village's 50 per cent for $49.5 million, giving it total control of the business. The money was finally paid last week out of the Sky City sale and lease back of its flagship Auckland Metro cinema complex.
Analyst Rob Bode of First New Zealand Capital was relaxed about the short period between taking 100 per cent and moving to sell. He said things changed in 12 months and it was easier to sell 100 per cent of a company than it was to sell 50 per cent of a joint venture.
Some in the entertainment sector question why Sky City paid more than $35 million in goodwill to Village then dropped the Village name.
But Bode said Sky City was paying for the dominant position in Auckland, not just the name.
The downside of full ownership has been that Sky City has taken on all the costs of expansion in a business that already had a heavy capital requirement.
ABN Amro analyst Carolyn Holmes said last week the sales might raise $116 million. But film industry insiders thought that figure high - considering there was a limited number investors with corporate backing.
Hoyts Cinemas recently opened a lavish 10-screen complex at Auckland's Sylvia Park and, as it is under-represented in Auckland, might be a potential buyer.
But like Sky City, Hoyts' owners are reviewing their cinema holdings. Hoyts is a joint venture between Publishing and Broadcasting - the Kerry Packer media vehicle that has sold 75 per cent to private equity company CVC Asia Pacific - and West Australian Newspapers.
US-owned entertainment company Reading Cinemas has 48 screens across the country and is also under-represented in Auckland.
Industry sources said there had been talk of forming a consortium to bid for the cinemas.
Reading did not return calls.
New Zealand cinema entrepreneur Barry Everard has recently sold out of a joint venture with Reading Cinemas in Christchurch and and owns Berkeley Cinemas in Auckland including a complex at Botany Downs. Everard said he would be interested in Sky City Cinema.
Big screen
Sky City's cinemas:
69 screens at Sky City Cinemas
67 per cent stake in Village Cinemas Fiji, with 10 screens
50 per cent of Rialto Cinemas' 23 screens in New Zealand.
