Just as trading started on June 3 at the New York Stock Exchange, shares in Regal Entertainment Group (RGC ), the nation's leading chain of movie theaters, plunged by more than 22%. Yet most investors in Regal likely welcomed the drop, evidence that Regal had paid a special $5 cash dividend, its second big payout in a year.
The shares fell in simple recognition that anyone now buying Regal wouldn't get the dividend. What most investors may not appreciate, however, is that Regal was able to make the payment not because lots more people have been escaping their troubles and buying Jujubes at one of the chain's 545 theaters. In the latest quarter, Regal's favorite gauge of profitability, EBITDA, or earnings before interest, taxes, depreciation, and amortization, actually had edged down, its profit margins narrowing. To make the $718 million payout, Regal first had to borrow from its banks. Then, it was forced on June 1 to defend the dividend in Delaware court. Regal is controlled by Denver billionaire Philip Anschutz, a director whose majority stake brought his share of the extraordinary dividend to $368 million. A minority shareholder, Teachers' Retirement System of Louisiana, complained that this amounted to self-dealing and a breach of fiduciary duty.
THAT ARGUMENT went nowhere. The court ruled that so long as Regal paid the dividend equitably to Anschutz and minority shareholders alike, it could go ahead. It's beyond me to second-guess the court on the current state of Delaware corporation law. Yet the suspicions prompting the pension fund's plea won't end as long as majority shareholders exert their will in ways that minority investors see as, at best, dubious.
A spokesman for Anschutz directed me to Regal's chief financial officer, Amy Miles, who laid out the case for borrowing to pay the dividend. Regal, she said, is a mature, slow-growing business with limited expansion opportunities but steady cash flow and an underleveraged balance sheet. In other words, Regal's operations are able to support more debt. Via the new borrowings, Regal might return to investors some of its value directly in cash. Anyone who bought into Regal at its May, 2002, initial public offering had seen a 40% total return. "If you have a problem with that," she said, "why not sell the stock?"
It's a reasonable question. Yet the arguments made by Louisiana's pension fund, which the court dismissed, focus not just on the past, but also the future. Regal, the pension fund's lawyers noted, was formed by Anschutz out of the wreckage of three theater chains that in 2001 and 2002 emerged from bankruptcy. Despite this legacy of financial distress, Regal had borrowed enough last year (to pay its first extraordinary dividend, of $5.05 a share) and this year (to pay the second, of $5) that its total debt has tripled, to $2.1 billion. Regal's ability to service the debt also grew over the period, but not nearly as fast. Between the two special payouts, Anschutz more than recouped his original investment, subtly shifting risk onto public shareholders. "It's a way to get your profit out and maintain control of the company," an attorney for the pension fund, Jay Eisenhofer, told me. "You only see dividends like this being paid where there is a controlling shareholder."
So, where's the harm? It's hard to see, as long as Regal pays its debts. CFO Miles told me Regal always considers "downside scenarios," but as far as what could go wrong to make it rue its indebtedness, "that's not something I lose a lot of sleep over." The credit rating agencies, Moody's Investors Service (MCO ) and Standard & Poor's (MHP ), are less complacent. They issued warnings.