Cineplex, the sequel
How did a tumultuous history hone the entertainment company’s toughest strategic risk lessons—and its next act?
In early June, anticipation at Cineplex inc. was building for an unusual event: it didn’t involve A-list actors, superheroes or, most striking, movie theatres at all. On online forums, fans who chattered about the pros and cons of getting to Toronto’s Scotiabank theatre weren’t paying up to $80 a ticket for the latest blockbuster. Instead, they’d gather to cheer on gamers competing in the North American league of legends championship matches.
Long-time Cineplex executives had more than ringside seats. As hosts of the event through its subsidiary WGN, the company is looking toward a future that includes more eSports showdowns. “People are amazed that 40,000 people will come to Seoul, Korea, to watch professional video gamers play in a stadium,” says Gord Nelson, Cineplex’s chief financial officer. “That’s coming to North America.”
For Nelson and his colleagues, e-Sports aren’t just about entertainment—they’re part of a well-honed, five-part risk response forged during a dramatic corporate history. After working through more than one reversal of fortune, Cineplex’s key executives have come away with a slate of strategic risk lessons that have carried the company into its next act.
With loss, risk lessons
The cinema sector faces certain unique risks. Take their product—theatre operators are never sure what kind of movies Hollywood studios will deliver, or how audiences will react. Then, there’s piracy and shifting customer habits that accompany more traditional property and liability exposures. Against this backdrop, Cineplex has faced down sizable strategic risks, especially in the past two decades—a stretch between 1989 and 2001 included reputational challenges, a merger and Chapter 11 filings. “It was a time of fighting fires and fighting for survival,” says Nelson, whom Financial Executives International (FEI) Canada recently named Canada’s CFO of the Year.
In confronting strategic risks today, the company has the advantage of hindsight. The ousting of Cineplex Odeon founder Garth Drabinksy in 1989 left the first risk ripple effect. “We were charged with a large debt legacy,” recalls Cineplex CEO Ellis Jacob. The company owed roughly $750 million at the time, and when Jacob met with banks, he offered them a choice: “allow me work with my team to fix it, or you take the keys.”
At the time, the company—known as Cineplex Odeon Corp.— had wide-ranging holdings that included multiplexes, Toronto’s Pantages Theatre, the rights to The Phantom of the Opera and a part ownership in Universal Studios. “We were a conglomeration of entertainment-related assets that perhaps weren’t necessarily tied together in an ecosystem that enhanced the value of each of the individual assets,” says Nelson.
After paring down its holdings, the risk lesson that emerged was fairly black and white, he says, noting that the pitfalls of “over-paying for assets because [it was] assumed they had a golden touch” prompted a back-to-basics approach. “You really need to have a well-disciplined strategy that looks to expand capabilities of existing [operations.] That was a big learning point during that process.”
A conservative view
While the company emerged from the Drabinksy era as an attractive acquisition prospect for U.S.- based Loews in 1998, by 2001, the new entity, Loews Cineplex Entertainment Corp., had filed for bankruptcy protection. If the previous years had been tense, this phase upped the ante, Nelson recalls. “One day, you might have to shut down 20 theatres in the middle of the night, strip out the assets we needed, and notify the landlords that we were rejecting the lease. The next week, you might be preparing to appear before the courts.”
During the bankruptcy process, the company downsized by two-thirds, and “softer” risk response elements came into play, according to Nelson. As the company had to let people go, the relationships with remaining employees, suppliers and other partners were more important than ever, he says. Without benefits like bonuses or guaranteed business for suppliers, the situation underscored “how important it is to work out the non-economic factors of relationships, like transparency, trust and integrity,” he says. “It was important to have a team that was committed to jumping from one crisis to the next one.”
The ultimate lesson? “With any kind of acquisition or processes, “make sure you’ve covered yourself with the most conservative view of what might happen and protect yourself against negative affects in the short-term,” he says.
Take the risk
Even when fortunes brightened, key alliances didn’t come easily. By 2005, the company was eager to acquire competitor Famous Players. That coincided with a soft period for the North American box office, recalls Dan McGrath, Cineplex’s chief operating officer. Naysayers were doubtful that the government would approve the deal because of the market share both companies held, adds Jacob. “The government wasn’t that keen on us buying them, Viacom wasn’t that happy selling to us, and the employees weren’t sure they wanted to work for us. So, we had a lot of strikes against us.”
McGrath agrees. “That was putting a lot on the line from a risk perspective … and there were certainly members of our board who were worried about the size of the transaction.” After a lengthy back and forth with government officials that began in October, 2004, and a deal was reached in the summer of 2005.
Even before a clear lesson emerged, Cineplex made risk gains, acquiring a risk management team from Famous Players that helped set new benchmarks for the newly combined entity, says McGrath. “Famous Players had a much stronger risk management team,” he says. “They’ve added a lot of value to the organization.”
As for an overall risk lesson from that transaction? “Take the risk, but take measured risk,” says McGrath. “We didn’t invest $500 million into a business we didn’t know or understand. It was certainly a huge move for us.”
Movies and mitigation
The cumulative result of those lessons? A more balanced view of potential risks and compensating processes that allow the company to move forward, says Nelson. “It’s easy to say, ‘Can you manage the risk and can you ensure that there’s adequate control in all your systems, in all your business units to cover 100% of the potential issues?’” he says. “But that’s not a realistic view of where you want to be, because it may impede development of new product offerings or businesses.”
Potential moviegoers have an array of other options. “It used to be, you were either staying home watching linear TV, a DVD or Blu-Ray, or had an opportunity to go to the movies,” McGrath says. “Now, you’ve got massive amounts of content available to you at any time.” The company is focused on addressing strategic risks related to content, audience habits and the technological evolution. “Right now, we have a very strong process in place to look at how we expand and diversify our business … and reduce our reliance on the key risks that might potentially impact us in the longer term,” says Nelson.
Offering non-Hollywood content is one such measure. The company has opted to showcase Bollywood movies and Metropolitan Opera performances, and last year, joined forces with HBO Canada to show the Game of Thrones season finale in certain theatres. “We’re extending the skill sets into markets that are developing and growing and have opportunity in the future, as opposed to overpaying for an asset that is potentially overvalued today, and then fighting to maintain that value going forward,” he says.
Its eSports venture—last year’s $10-million deal netted the company an 80 percent stake in gaming specialist WGN—will tie the company’s foray into live entertainment with popular online and in-theatre tournaments. Another “live” offering will debut later this year with The Rec Room, a one-stop destination for amusement gaming, live entertainment, dining and screening of sports or other popular culture events.
Other businesses—including its indoor digital signage venture Cineplex Digital Media and in-cinema advertising—both add to Cineplex’s risk countermeasures, and serve to usher in its latest incarnation. “We were a movie theatre company, now we’re an entertainment company,” Jacobs says.
But there’s another factor that’s proven invaluable, according to all three executives. Financial like-mindedness—all three of these top executives have an accounting background, either a CA or a CPA, which establishes a common decision-making foundation for its core leaders. “We have the same insights toward risk, so when you take a look at how we approach any opportunity or any challenge, because we have worked together so long and worked together so well (it doesn’t mean we don’t challenge each other, we do all the time), it allows us to get things done a lot more quickly,” says McGrath.
That means less hand-wringing and a more direct route to a pilot project and eventual national roll-out. “You have to know when we’ve done enough number crunching and when the gut needs to also kick in and prevail,” adds Nelson. “We need to say, ‘Let’s move forward and accept this level of risk.”’
Copyright © 2016 Transcontinental Media G.P. This article first appeared in the Fall 2016 edition of Corporate Risk Canada magazine