Gaynor: Horror show at the movies

By BRIAN GAYNOR

Peter Francis must break into a big smile every time he contemplates the sale of his controlling stake in Force Corporation to Sky City. His timing was near-perfect; the cinema operator has been in a virtual tailspin since he sold his 50.2 per cent shareholding last March.

Argentina's economic crisis dealt Force another major blow last week. The closing date of its $31 million mandatory convertible notes issue had been last Friday, but has been extended until February 1 because of the peso's devaluation. If the issue is canned, the cinema operator will struggle to survive in its present form.

Force's South American investment has many similarities to Air New Zealand's involvement with Ansett.

In 1996, Force invested in a joint venture with Village Roadshow of Australia and Argentine businessman Eduardo Astrada to enter the Argentine cinema market through Village Cinemas. Force owns 25 per cent of the joint venture company, Village Roadshow 55 per cent and Mr Astrada 20 per cent.

The principal objective of Village Cinemas was to build several multiplex theatres, sell these properties, reduce debt and lease back the cinema assets. Mr Francis believed that the Argentine cinema industry had excellent growth prospects and Mr Astrada's local knowledge would be invaluable.

The first multiplex was opened in 1997 and the joint venture grew rapidly until 1999 when the Argentine economy fell into recession. It is now the nation's largest exhibitor with 69 screens in six complexes.

Village Cinemas has been unable to sell its completed multiplexes because of the recession and has ended up with much higher debt than anticipated.

In 1999, a syndicate of banks led by ANZ Bank provided Village Cinemas with a six-year, $US90 million ($210 million) note facility. Force and the other two shareholders granted security to ANZ Bank by way of a charge over their shareholding in Village Cinemas. The New Zealand company gave additional guarantees up to a maximum of $US15 million.

Village Cinemas started breaching its bank covenants early last year, a situation known to Sky City at the time of its Force acquisition. Since then it has been required to reduce its ANZ borrowings from $US90 million to $US62 million through a combination of internally generated cash and further contributions from shareholders.

ANZ now wants to replace its existing $US62 million loan with a new, $US45 million facility.

Shareholders will fund a significant proportion of the $US17 million repayment, with Force committed to a maximum of $US4.25 million ($10 million).

Money raised through Force's proposed $31 million mandatory convertible note issue, which is conditionally underwritten by Sky City, will be allocated as follows;

* Approximately $13 million will be contributed to the $53 million due to MTM Funds Management on January 31 for the buy-back of the Force Entertainment Centre (ANZ Bank will provide the remaining $40 million).

* $5.4 million will be used to repay short-term funding provided by Sky City.

* Approximately $10 million will be advanced to Village Cinemas to be used as Force's contribution to the $US17 million ANZ loan reduction.

The convertible note underwriting agreement is conditional on the new $US45 million ANZ Bank facility being completed. This has not happened because it depends on the Argentine peso remaining relatively stable, and the currency has fallen substantially since the recent devaluation.

Force is now in a very precarious position. It has continued to pump money into Village Cinemas and given US dollar loan guarantees, yet it has no control over the Argentine company. Village Cinemas faces a very difficult future because its income is earned in a rapidly depreciating local currency and its debt is denominated in US dollars.

As at June 30, Force had shareholder funds of just $3.2 million and long-term debt of $94 million. These borrowings include the $50 million loan from MTM that is due to be repaid next week, but do not include the $US15 million Village Cinemas guarantee.

Force's Argentine investment has a balance sheet value of $12 million after a $39 million writedown in the June 2001 year. If further Argentine write-downs are required, then Force will have negative shareholder funds and will be in serious trouble.

Sky City's managing director, Evan Davies, now faces a very difficult decision. Under the terms of the underwriting agreement he can either walk away from this commitment or pump more money into Force.

If the underwriting agreement is terminated then all subscriptions, which are currently held in a trust account, will be returned to shareholders but Force will be seriously at risk.

If the terms of the $US45 million facility are successfully renegotiated and the $31 million mandatory convertible note issue proceeds, then Force will survive to fight another day but will probably require a further equity injection. Mr Davies and his management team will also have to commit an enormous amount of time to the cinema group.

Mr Davies must have constant nightmares over his Force investment. He should never have invested in the high-risk cinema operator, particularly when he was doing such a good job managing Sky City's casino operations.

Carter Holt Harvey

The mood at yesterday's Carter Holt results presentation was one of relief rather than confidence.

Chief executive Chris Liddell was delighted to report a sharp increase in operating earnings for the December quarter but the group's net tax-paid profit for the nine months to December was only $6 million. This minuscule profit was generated from shareholder funds of $5 billion and was after a tax credit of $40 million.

Carter Holt's problems are directly attributed to depressed commodity markets.

Japanese A grade log prices averaged $US51 per tonne in the latest quarter compared with $US80 at the end of 1997. Korean K grade logs are down from $US70 a tonne to $US40 over the same period.

Pulp prices have been just as depressed. Bleached pulp is down from $US700 tonne at the end of 2000 to below $US400 and unbleached pulp has fallen from $US500-plus per tonne to below $US400 over the same period.

Mr Liddell said that prices were unlikely to rise in the next two quarters but he remained confident about the medium to longer-term outlook.

Carter Holt has a net tangible asset backing of $2.66 a share but should be earning at least $300 million to justify a share price in this vicinity.

The group has had six straight years without reporting a $300 million profit and it is unlikely to do so in the year to December unless there is a rapid upturn in commodity prices.

* bgaynor@xtra.co.nz