FREE ESSAY ON CASE STUDY - CINEPLEX

CASE STUDY - CINEPLEX

Company Background
In 1979 Garth Drabinsky and Nathan Taylor formed Cineplex. From early on Cineplex saw
itself as a niche player. They used small screens to show specialty movies and they
employed this strategy not to challenge major chains, but to compliment them. Cineplex
did well primarily because of their concept for carefully planned use of shared
facilities. 
With this success they began to expand across Canada with a very rapid rate of expansion.
During this expansion however they amassed a 21 million-dollar debt. Also, distributors
became reluctant to supply Cineplex for fear of alienating the two largest Canadian
chains. In 1983 to avoid bankruptcy, Cineplex reduced its debt by selling off some of its
recently purchased assets. Darbinsky also took legal action to win back access to major
releases. Son after this time he also purchased the Odeon chain so that he would be able
to bid for early runs of movies. This gave Cineplex a major position in the industry. 
Through Darthbinsky's relentless tactics Cineplex Odeon was the second largest motion
picture chain with 1,800 screens in over 500 locations. Now that Darthinsky owned one of
North America's major theater chains he sought to change the movie going experience by
changing the layout and atmosphere of the theaters to attract even more moviegoers.
Drabinsky endeavored to use the size of his chain to obtain added clout with film
studious and distributors. 
Drabinsky had no plans to slow his companies' rapid pace of expansion and he extended
Cineplex Odeon's production activities through other branches of the entertainment
industry. His unrelenting drive for growth placed tremendous pressure on the company's
finances. As doubt grew about the financial health of Cineplex Odeon, Drabinsky
reputation as a brilliant strategist was gradually subject to increased scrutiny. He
realized his weaning support and ho sought to gain control by buying a large stake in the
company. MCA, one of the controlling stockholders, blocked this successfully and forced
Darbinsky from his leadership position with the company. When Darbinsky left he left a
company carrying a massive $655 million dollar debt. 
Alan Karp assumed the leadership role and immediately began to cut costs and divest some
of Cineplex Odeon's assets. He also took steps to increased concession revenues. In a
short amount of time Karp was successful in cutting the debt by ? and was able to switch
back to more of a strategic focus. He began to show interest in further growth. As of
1995 Cineplex Odeon reported a loss of $30 million for the 1st 6 months of the year.
These numbers started to raise concerns about Karp's ability to turn things around. His
attempt to merge with a major chain failed a few months earlier. Although the merger was
called off Karp remained enthusiastic about the potential of the company.
Analysis
Financial
I would rate their current financial condition as fair to poor. 
Return on Total Assets - not significant
Current Ratio - .22891 (very poor)
Long-term debt to equity ratio - 81.85
Many of their financial ratios are significantly insignificant with profits being
negative. 
SWOT
Potential Resource Strengths 
1. 85% percent of the company's U.S screens were in the top 15 U.S. markets, while 75% of
its Canadian screens were in the top 10 Canadian Markets. 
2. Cineplex recently spent $57.5 million in refurbishment and construction of new
theaters. This included introducing DTS sound systems in many of its locations. 
3. Now embraced a strategy of cautious growth and more sound financial management.
4. With its relatively large size Cineplex could use some muscle to get first run movies
and demand bigger revenue splitting.
5. Had very strong concession sales.
Potential Resource Weaknesses
1. Seemed to have no clear strategy or business plan - at one point Karp stated "that he
had not even begun to consider what strategic benefits Seagram might bring to Cineplex",
something he should have been looking at. 
2. Fair to poor financial condition with in the company. Weak balance sheet and excess
debt.
3. History of overaggressive expansion - weary shareholders and stakeholders may prevent
or slow future mergers or acquisitions.
Potential Company Opportunities
1. Alliances or mergers to expand coverage. Karp believed Cineplex was capable of running
a theater chain twice as big. 
2. The international exhibition business. 
3. Vertical integration into the production industry as regulations had been relaxed.
4. Expanding to new geographic areas.
Potential External Threats
1. Loss of sales to substitutes - Video/DVD's, pay per view, network television,
Internet. 
2. Loss of market share due to increase in competition and the increasing number of
screens in markets. 
3. Splitting of revenues between distributors and exhibitors. Distributors had more
options and could demand higher revenues from the exhibitors. 
Alternatives
1. The status quo. Continue to enact cost cutting measures and to increase revenues.
Employ a no growth strategy and focus on current markets. Analysts believe however that
with the current state of affairs Karp could not turn the company around. It was said the
Cineplex was losing up to $4 million a month in operating revenues. 
2. Alliances or mergers to expand coverage. Karp believed Cineplex was capable of running
a theater chain twice as big. This could reduce overhead cost and go right to the bottom
line. Probably one of the best alternatives for Karp and Cineplex to remain competitive
and to increase the value of the company.
3. Enter joint ventures or alliances to expand coverage in international markets.
Untapped markets could be very profitable however; additional funding would be difficult
to impossible.
4. Vertical integration to reduce threat of increased distributor power. Again additional
funding would be difficult, also may face regulatory scrutiny. 
Recommendations 
As I reviewed the case my recommendation would be to look for a merger. This could
enhance there standing both financially and competitively. By seeking a merger they could
stabilize themselves financially by further reducing their debts and overhead costs. They
could also fight more aggressively for market share and look for international
opportunities. The potential would also be there for more bargaining power with the
distributors. 
Conclusion
By seeking a merger this would benefit all the stakeholders in the organization, the
management, the stockholders, and the customers through the benefits that would come
about. Karp should continue to pay down as much debt as possible and aggressively seek
merger opportunities immediately.