Movie Palace Coup

Harvard grads create a buzz building Mexican cinemas

Matthew Heyman had just one idea when he arrived at Harvard business school in 1991, fresh from a middle-management job in the cinema industry. He wanted to run a big theater chain. If he couldn't, he would start his own. It didn't matter where. "I asked everyone from every country," says Heyman.

Hearing of opportunities south of the border, he enlisted two Mexican classmates to help him transform his goal into a business plan. Together, they conceived the idea of building first-rate theaters in Mexico City, where the industry was in a shambles. The plan fulfilled a course requirement for their last semester, but to Heyman that was beside the point. "We're not doing this for a grade," he told his class partners Adolfo Fastlicht and Miguel Angel Davila. "We're doing this to do it."

Five years later, the trio has managed to turn its class project into a class act. Graduating from Harvard was the easy part. Since 1993, they have fought for financing, battled the local union, and weathered Mexico's worst recession in 60 years. Today, their company, Cadena Mexicana de Exhibicion, or Cinemex, dominates the movie-theater scene in Mexico City, with 147 of the city's 416 screens and $35 million in sales last year--about 40% of the city's ticket revenues. Its shareholders now include J.P. Morgan Capital Corp. and Hoyts Cinemas Groups of Sydney, Australia. "This was my shot at entrepreneurship," says Heyman, the son of a TV salesman from Los Angeles.

Certainly, Harvard diplomas and local connections didn't hurt. But vision, persistence, and a feel for the local marketplace mattered more. "In a nutshell, they've revitalized the industry," says Luis Ruiz, sales manager for Videocine, a Mexican film distributor.

STALE POPCORN. The trio's timing was no accident. Their plans for Cinemex took shape as the government was lifting decades-old price controls on tickets that had discouraged owners from upgrading their decrepit theaters. Sound quality was abysmal and the popcorn stale. Middle-class Mexican moviegoers had retreated to their videocassette recorders. Heyman bet that they'd pay for top-notch sound, image, and service.

Even before the business plan was done, the three grad students began to bluff Cinemex into existence with no more backing than their personal bank accounts. Fastlicht, now 31, used his family connections in Mexico City's real estate business to announce Cinemex was seeking space to lease--a bid to legitimize the venture to potential investors. Meanwhile, Heyman, who at 29 had been making $100,000 as Cineplex Odeon Corp.'s vice-president for business affairs in Toronto, unsuccessfully sought financial backing from his former employer.

Their money dwindled that semester as the trio racked up air miles back and forth to Mexico City. Heyman raided his savings account. Davila, now 32, tapped the scholarship funds he had gotten for tuition. (As a result, he didn't get his diploma until he could pay Harvard back a year later.) By April, 1993, Heyman and his partners had finished the plan, but they needed $6 million to bring it to life. A contact with A. Allen Friedberg, the retired CEO of what is now Sony/Loews Theaters, gave them entree to chief executives of U.S. chains, but everyone turned them down. They finished up their MBAs; Heyman went home to his family in Los Angeles. Davila and Fastlicht returned to Mexico City to raise capital. That summer, Davila even turned down a job at Goldman, Sachs & Co. to pursue their goal.

WINNING COMBO. Cinemex' big break came in October, 1993, from an investment fund of J.P. Morgan & Co. Months earlier, at a Mexico City dinner party, a friend had told Fastlicht that an associate at Morgan's local office was interested in investing in movie theaters. Fastlicht gave him their plan, which eventually ended up with fund managers in New York. They liked the combination of Heyman's movie-theater background and the local expertise offered by Fastlicht and Davila, who is well-connected in government circles. Says Tim Purcell, who runs J.P. Morgan Capital's Latin business from New York: "They were very impressive, and they had enthusiasm." Morgan Capital agreed to invest as much as $8 million for 40% of Cinemex. With Morgan's backing, hesitant Mexican investors who had pledged only small amounts now signed on for more, while CMEX Investors, an affiliate of Chicago's JMB Realty, put up almost $5 million. Altogether, Cinemex had $21.5 million in startup funds.

Then, in December, 1994, before Cinemex could open its first theater, the government devalued the peso. The dollar value of what local investors had put up suddenly fell by half. But Heyman and his partners grimly pushed ahead. Soon, all of the international cinema chains--except Dallas-based Cinemark USA Inc.--had dropped their plans to enter Mexico; Cinemex had Mexico City almost to itself.

In August, 1995, the company opened its first multiplex in a new luxury shopping mall, investing $3.5 million. But to revolutionize Mexican moviegoing meant first breaking the movie theater union, says Davila. Rigid work rules had created massive inefficiencies: a popcorn seller, for instance, wasn't allowed to handle soft drinks. The union fought back, occupying the lobby with 150 protesters a few days before opening. Davila hired security guards to keep the picketers out and then outflanked the union by opening on Wednesday rather than the expected Friday. The union moved the battle to the local labor board, but it ultimately sided with the company and recognized a more flexible union. Cinemex now has some 1,100 employees. About 65 work at headquarters; the rest, mostly students, run the theaters.

The buzz grew as Cinemex continued to open multiplexes. The theaters charged premium prices, about $3.50, but even in the midst of recession, middle-class Mexicans seemed willing to pay for quality. Would the working class, too? In May, 1996, Cinemex opened its doors in a poorer neighborhood. "If that deal wasn't going to work, our market was this big," says Heyman, his thumb and forefinger in a loose pinch. Tickets at that theater went for a dollar less than the others. Even then, with the average Mexican earning just over $10 a day, Cinemex was expensive. Yet the strategy worked. Working-class families splurged on movie tickets and snacks as if they were "going to Disneyland," says Heyman.

HOMESICK. Cinemex' success has drawn new capital for expansion. In late 1996, Hoyts Cinemas, a publicly held company with theaters worldwide, bought a 35% stake in Cinemex for $22 million.

Despite big-time backing, the three partners, who all go by the title of "director," remain firmly in charge. Heyman is the dealmaker and strategist. He attends film festivals, buys equipment, and negotiates with distributors. Davila presides over operations, and Fastlicht directs the real estate department. Their deal with investors will give each of them a stake of just over 5%, probably by year's end.

What about competition? As Mexico rebounds, U.S. chains are piling in, while old local players regroup. "This is the city that has the closest risk of saturation," says Alejandro Ramirez, chief operating officer of Mexico's largest movie theater company, Organizacion Ramirez. In June, Ramirez plans to open his eighth Mexico City multiplex in a middle-class suburb. It will offer a cafe, child care, and a customer-service counter to call taxis and make dinner reservations.

The competition isn't scaring off Cinemex, which is confident it can maintain its lead. "We're going to own Mexico City," boasts Heyman. He figures the metropolis could eventually support 700 screens, with 400 belonging to Cinemex. At its current growth rate, Cinemex could reach that goal in a couple of years. Then what? Heyman, admittedly homesick, says he would cash out for the right price: "I would love to run a theater chain in the U.S.," he says. After Mexico City, that would be a cinch.

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