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The Shoeshine Column: For sale - one cinema group, slightly used

Friday 30th June 2000

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Today is cinema group Force Corporation's balance date. As the company's beancounters square off the books and prepare for the auditors' arrival there will be some interesting debates on what goes where.

When it appears the profit result is likely to be mixed. The Argentina cinema operation, Village Cinemas SA, is growing fast. First-half admissions were 2.9 million and are likely to reach five million for the full year, passing New Zealand's 4.6 million last year. Earnings before interest and tax were $US8.6 million ($18.3 million).

On the other hand New Zealand first-half cinema earnings were down and they may have fallen again in the second. The company usually blames this on Hollywood for failing to come up with another Titanic or Spy Who Shagged Me.

Still, one stable area and one growing quickly would satisfy most shareholders. So why has Force's chairman and majority shareholder, Peter Francis, been hocking the company around town like a hot hi-fi?

First, as far as Shoeshine knows anyway, there was the proposed acquisition of internet service provider Ihug. While the market generally greeted this enthusiastically - this was before the April Day of Reckoning for internet stocks - analysts scratched their heads trying to think of synergies between an ISP and a cinema group.

When that deal fell over Francis took off on a tour of corporate New Zealand trying to find anyone else interested in a takeover or merger. RadioWorks and Sky City were two of the companies said to have been approached. Neither seems to offer any better a fit than Ihug.

Perhaps Francis thinks another merger announcement will have the same effect on the value of his stock as Ihug had. Force shares, which trailed along at around the 60c mark all last year, took off when the Ihug deal was announced, hitting 91c at the peak.

They then fell just as fast and even harder. At the recent 39c level more than $40 million has been wiped from Francis' net worth.

Or it may be that Francis sees troubled times ahead for Force.

The company is midway through arbitration with Australia's MTM Entertainment over a disputed contract to buy the Force Entertainment Centre in Auckland.

When Force was sticking the centre up, MTM signed what Force described as an "unconditional" agreement to buy it when it was completed.

MTM has lent Force $51.25 million to date for the development. The debt carries a "loan fee" equivalent to 9.5% a year and was to be repaid from the proceeds of the sale to MTM.

But MTM has cut up rough, for reasons best known to itself. It claims the practical completion of the shell of the centre overshot the December 30 agreement date, a claim Force disputes. MTM says the purchase and loan agreement is void and it wants its money back.

According to the annual report Force's interest bill last year was a paltry $350,000. What the report doesn't show is that the loan fee payable to MTM - some $4.87 million a year - is being capitalised. Another year's fee would make the loan $56.1 million.

So, if MTM wins its argument in arbitration, or in a subsequent court case, Force will have to pay back the full amount of the loan plus accrued "interest." It will have to refinance with bank debt, adding $5 million or more to its annual interest bill. That would make quite a hole in last year's $7.8 million of net earnings.

Against that it will be pulling in $6.8 million of rent from the centre's tenants. But with the Mount Wellington Highway development also unsold after several months on the market it will be a highly geared company with more than half its balance sheet tied up in properties it doesn't want, and nobody else seems to want either.

Of course the arbitration may come off in Force's favour and get the centre out of the company's hair. Francis expects a small loss because of cost overruns.

That would allow Force to concentrate on its cinema operations. But with the Village Force-Hoyts merger off and cinema audiences on the decrease around the world it's not hard to work out why Force features prominently on brokers' "sell" lists.

Infratil Australia's directors deserve a bouquet from shareholders for the way they've handled Hastings Funds Management's 95Ac takeover offer.

Fighting a 90Ac offer from Macquarie Infrastructure Group Hastings raided the market last week but cocked it up by buying more shares than the 19.9% they were allowed under Australia's Corporations Law.

Australia's regulators were unwilling to step in lest they ended up depriving shareholders of what was, after all, the highest offer on the table.

Infratil was not so shy. Threatening to have the Takeovers Panel strip Hastings of the shares it had, it demanded the bid's one condition - that it meet 90% acceptance - be dropped.

That's important because Alliant Energy, which holds 10.1% of the shares, would have been in a position to deny Hastings 100%. Alliant has a pre-emptive option on Infratil's Southern Hydro asset, which Hastings wants to sell. The haggling could have kept sellers waiting for their money for a long time.

Hastings' victory has deprived Lloyd Morrison, 65% owner of Infratil manager Morrison & Co, of the opportunity to sell the company to Macquarie for $19.6 million.

All eyes will now be on whether and how Morrison & Co extracts from Hastings its consolation prize - the $25 million it is entitled to for the termination of its management contract.

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