Vue’s management buy-out positioned the UK’s second largest cinema chain to play a leading role in the transformation of cinematic entertainment.
Vue’s recent management buy-out has the UK’s second largest cinema chain poised to play a leading role in the transformation of cinematic entertainment.
Having already taken the business from a garage-based start-up to a chain of close to 60 multiplexes, chief executive Tim Richards believes the MBO will further enable Vue to capitalise on the opportunities arising from the new era of digital technology.
‘It’s the only thing that keeps me awake at night – the excitement,’ he says. Richards built up his extensive experience with the United Cinemas International chain and then Warner Brothers, where he dramatically expanded the company’s international presence. With private equity backing from Boston Ventures, in 1998 he set up his own company, then called SBC International Cinemas. Richards wanted to develop a cinema chain that would meet the needs of all customer groups – the core base of young people, but also the greying baby boomers, an increasingly important demographic for cinemas.
‘I left my corner office at Warner Brothers for the glories of my garage for two years,’ Richards recalls. ‘I had a single shareholder and we were pursuing an organic growth model which was going to be supplemented by acquisition.’ Clarity Partners and Legal & General Ventures also became private equity backers in 2003, when SBC changed its name to Vue Entertainment and acquired the Warner Village Cinema chain in the UK. That deal took Vue’s multiplex cinema tally to 42. Having completed subsequent acquisitions and new-build projects, Vue Entertainment now has a portfolio of almost 60 cinemas and plans to build another 16 to 20 in the next few years.
This June Richards and his team executed a management buy-out, enabling the three existing private equity backers to exit. Into their place has stepped the Bank of Scotland, with whom Richards has negotiated an integrated finance deal valued in the region of £350 million. This will enable Vue to begin a new phase of development. As part of the deal the bank has taken a minority stake, while the management team together holds 51 per cent.
The buyout marks a new stage in Vue’s evolution which will focus on harnessing the groundbreaking developments in cinema technology. ‘A wholesale change to digital is about to take place across the whole cinema circuit, which is going to be one of the most exciting, revolutionary things to hit the business – probably ever,’ Richards says. ‘It will be life transforming, absolutely life transforming.’
The incoming digital revolution is the reason Richards opted to call his company Vue Entertainment, rather than Vue Cinemas. ‘We are testing different business models right now,’ he explains. One of those models centres on music. Vue has already hosted live concerts to mark DVD launches for bands like Queen and Green Day. ‘We recently had Pink Floyd in here as well,’ Richards says. ‘That’s just the tip of the iceberg. We will eventually be able to host music concerts and link up across the country. A cinema auditorium has wall-to-wall, floor-to-ceiling screens and digital surround sound. People don’t realise that it is a sound stage; it is acoustically perfect.’
Digital technology can also be used for video games. ‘We are going to test video games in cinemas this year,’ Richards says. ‘The technology is with us right now to have up to 100 characters on screen at once, with a wireless LAN in the auditorium and wireless game pads. With a digital projector you can shoot people, chase people, race them, and have fantasy games. And the winners from local cinemas can compete nationally and even internationally on the same screen.’
In addition to the digital technology, the new 3D experience is ‘an immersive experience which is second to none’, Richards says. ‘It’s like nothing you have ever encountered with 3D before. Customers will pay more for it, because it’s a different experience. When you see a football kicked out at you into the audience off the screen in 3D, you don’t only feel like you are there, you feel like you are in the game.’
Innovation is embedded in the Vue culture. The company was the first cinema chain in Europe to do away with box offices. Instead, customers buy their tickets at the same tills where they pick up Coke, popcorn and ice cream. ‘We are constantly testing new ways of doing business,’ Richards says. ‘We opened up our first purpose-built new cinema in October in Blackburn and it was hugely successful – outrageously successful – and that created a problem because we didn’t know why. So we had to work out what component of the new business was responsible for the success. It’s a nice problem to have.’
Meeting such challenges relies on the talent of Vue’s management team – an asset that any backer will assess before supporting an MBO. The June buyout enabled the management shareholders to take out a small tranche of cash, while rolling over a considerable amount of equity into the new venture. Richards says: ‘I had always hoped and believed that my team was so passionate about what they were doing that it would have no effect. But you never know – money can do funny things to people. It was really refreshing that a week after we closed, people were still in the office at midnight. It is not money that’s motivating and driving people. It’s that people love and enjoy what they do.’
This new phase of Vue’s development is suited to the relative stability and long-termism of integrated finance. Richards says he didn’t know exactly when the three original private equity houses would want to exit. ‘Whenever you get into bed with the private equity world you know it is not a long-term play,’ he says. ‘They are opportunistic and if somebody comes along with a big cheque, they sell.’
Despite this inherent uncertainty, Richards’ experience of private equity has been a positive one. ‘I was very fortunate in that I had one absolutely fantastic founding shareholder, and two other really great shareholders. But the difficulty with three shareholders was they all had different methods and different ways of valuing the company. It created a certain level of complexity that involved a lot of time and a lot of work.’
Richards and his shareholders explored a range of exit routes before settling on an MBO. Options considered included trade sale and flotation. New private equity deals were also considered, and this led to a meeting with the Bank of Scotland. Richards was immediately impressed. He explains: ‘Through their integrated finance unit, they are very supportive of management. They are more a banker than a potentially micro-focused private equity player. Also, the time horizons with them are very different because they are in it for the medium- to long-term. That’s a big plus for us because we are not a short-term business.’
Having met the Bank of Scotland’s integrated finance team in 2005, it then took Richards the best part of a year to complete the buyout. It was a relatively complex situation for Richards and his management team, as they were both vendors and buyers. Richards freely admits to having felt the inherent conflicts in the situation. ‘We have always prided ourselves on operating at a level of complete transparency with our shareholders,’ he says. ‘But it was very difficult. We were buyers; we were sellers. And depending on which issue it was being considered, we were conflicted. You do your best to navigate that professionally, but it is a real challenge. It is not a process I enjoyed.’
Richards understands that, even when the buyout deal was being planned, existing shareholders’ interests had to come first. ‘Ultimately my job is to get the maximum value for shareholders,’ he says. ‘My goal was, is, has always been to maximise value for the shareholders. So if a third-party buyer came in and wanted to write a very big cheque – that would be the thing that would make most sense for the company.’ Now that the buyout is complete, Richards is excited about the opportunity it gives management, which increased its holding from 15 per cent before the deal to 51 per cent afterwards. ‘Over time, with a lot of hard work and a bit of luck, we will pay down debt, we will refinance the company and it could potentially be very interesting for us,’ Richards says.
Richards has no illusions that the buyout will automatically deliver financial gain. ‘You have to appreciate the risk along with the potential rewards,’ he says. ‘You have to be comfortable with the capital structure and be aware that you could be tripped up in future by factors beyond your control. You want to have the most efficient capital structure for the company, but you also want to be able to sleep at night,’ Richards warns.
If Vue’s chief executive is suffering from insomnia, it’s only because he’s eager to get back on the ground and accomplish his vision. ‘People always ask what keeps you awake at night,’ he says. ‘I stay awake because I am so excited about the opportunities.’ Richards is pleased that the whole management team has a stake in Vue Entertainment. ‘That’s very important to me,’ he says. “My entire team have a large part of their net worth, or all of it, in the company. People are tied to the success of the company and that is highly motivating.
‘The MBO has strenghtened their understanding of the potential gains. Everybody took out a little bit of money – just to take a bite off of a few mortgages – but I think people saw first-hand that this is real and if we do things right, if we create the value we believe is inherent in the company, we can profit from it and potentially profit very well. It is also an endorsement, because they had an option to cash out. I take comfort from that as chief executive. And I think any shareholder would take comfort, because you are really putting your money where your mouth is because you believe in the proposition.’
This article was originally published in Masterclass magazine, in association with Ernst & Young.