THE NEW SHOW AT NEIMAN-MARCUS A little-known empire of movie houses and soft drink bottlers, General Cinema, is buying up control of the country's most glamorous retailer.
By John Paul Newport Jr. REPORTER ASSOCIATE Lynn Fleary

(FORTUNE Magazine) – FOR MOST of his 25 years as top banana at General Cinema Corp., Chairman Richard Smith has faced a problem other C.E.O.s would love: too much cash. The movie theaters he inherited from his father in 1961 churned out dollars so fast -- and consumed so few of them while growing into the nation's largest cinema chain -- that Smith has had to search constantly for ways to reinvest the proceeds. His first idea back in 1968 was to buy up mom-and-pop soft drink bottling companies. Now General Cinema is the largest independent Pepsi bottler in the country. But that success only compounded Smith's problem. The bottling companies throw off more cash than the theaters. So Smith has spent the better part of the 1970s and 1980s in quest of a third operating division that can regularly deliver the same high returns as the other two. He has jumped into furniture retailing, broadcasting, financing of films, and other ventures -- only to jump back out. Finally he seems to have found a business that's a keeper. As a result of buying into Carter Hawley Hale to save the department store giant from a hostile takeover, Smith is about to launch General Cinema into the glittering world of high- fashion retailing. In June, Carter Hawley will spin off its most desirable division to the public. The new company probably will be named Neiman-Marcus Group after its main business, a glamorous chain whose Christmas catalogue features gifts such as $2-million diamonds and his-and-her submarines. Bergdorf Goodman, the exclusive New York store, and a group of 167 trendy boutiques, Contempo Casuals, complete the package. General Cinema plans to swap its 49% stake in Carter Hawley for 60% of the new company, and Smith could soon gobble up the remainder. That would give General Cinema the business triple feature it has long sought. It also would cast Smith, 62, in the improbable role of fashion kingpin. A strait-laced New Englander, he moves briskly but speaks with forceful deliberation, rarely flashing more than a polite smile. He joined the family business right after graduating from Harvard College in 1946 and managed cinemas here and there until 1961, when his father died unexpectedly, leaving the son in charge. Smith's modest roots and abhorrence of waste are reflected in his company's austere headquarters, sandwiched between a sporting goods store and a General Cinema theater in a suburban Boston shopping center. Hardly the picture of a cinema tycoon, Smith loathes publicity. By several accounts he felt immensely uncomfortable having to hobnob with Hollywood types in the late 1970s, when General Cinema held a stake in Columbia Pictures. He seldom even sees a movie. ''I have found my own taste in film is not necessarily that of the common man,'' Smith explains with a trace of a Boston accent. ''I wish it were, because then it would be valuable.'' His most public pleasure is philanthropy; he has given millions to the Children's Hospital of Boston. For all his modesty, associates say, Smith has a penetrating intelligence as well as an iron will. Though a four-man Office of the Chairman runs General Cinema, no one questions who makes the decisions. Smith and his family, including sister Nancy and son Robert, who works for the company, control one- third of General Cinema's stock, worth more than half-a-billion dollars. Notes Emanuel Goldman, an analyst who follows the company for Montgomery Securities: ''A big part of Dick Smith's success is that it's his money he's investing, not some abstraction called stockholders' money.'' Owning the store has reinforced Smith's dominant trait: a ruthless regard for value. He invests only in properties he believes are deeply undervalued, and he takes profits quickly. As soon as a business emits whiffs of inferior returns or seems to be worth more to another company than it is to General Cinema, Smith is likely to cash out. With perverse pride he declares, ''We've probably divested more things than we've invested in. We've always been driven by the search for value, not the need to build an empire.'' That attitude raises the key question about General Cinema's involvement with Neiman-Marcus. Analysts view the Dallas-based chain as a rocket poised to ascend a steep trajectory of growth. But can Neiman lift off with Smith at the controls? Will he move aggressively to exploit the chain's potential? Characteristically, Smith declines to speculate, other than to describe General Cinema's coming relationship with the new company as ''something between a totally passive investment and an operating business.'' General Cinema can afford to fuel Neiman-Marcus's growth. Smith's little- known empire is lushly prosperous, with earnings last year of $126 million on $1 billion in sales. Return on equity has averaged more than 20% for the past ten years, and so has annual growth in earnings. The twin powerhouses of bottling and theaters, which generated $145 million of cash in 1986, are mature and strategically simple businesses that need only occasional tweaking. BOTTLING, which brings in two-thirds of General Cinema's revenues and four- fifths of its operating profits, has happily ridden Pepsi's surge in popularity. General Cinema's bottling companies, mainly in the Southeast and Midwest, have average profit margins of 14%, the industry's highest. Their secret is solid execution at the local level, such as seizing prime shelf space in grocery stores. Says Smith: ''It's blocking and tackling really. < There's no masterful strategy from the top.'' The movie division, with 1,257 screens in 332 theaters doing business under General Cinema's name, requires a bit more guidance. It is feeling the heat of increased competition both from a nationwide proliferation of theater screens and from the spread of cable television and videocassette recorders. Attendance is off, revenues are stagnant, and earnings have slumped 32% since 1984. Weak performance by theaters dragged down corporate profits 2% for the latest four quarters. Some on Wall Street believe General Cinema would do well to sell the business. Smith disagrees, arguing that fat profits from selling refreshments like popcorn, as well as healthy cash flow from depreciation, provide returns on equity that would be hard to beat elsewhere. He blames dwindling attendance on a poor crop of films, claiming that the negative impact of home video has peaked. Acting on his convictions, General Cinema will spend $40 million this year refurbishing old movie houses and opening 26 so-called multiplex theaters with an average of seven screens each. Yet Smith indicates that if the returns on this expansion prove meager, he would have no qualms about dumping the theater circuit his father began 65 years ago. Such concern for shareholder value has at times made Smith overly cautious, giving him a mixed record in diversifying. In the late 1970s General Cinema built a successful brand of soft drinks around the Sunkist name, licensed from the citrus cooperative. R.J. Reynolds bought Sunkist Soft Drinks in 1984 for $57 million, giving General Cinema an after-tax gain of $37 million. But forays into furniture retailing, bowling lanes, and the financing of films lost money. Former employees say Smith's lack of entrepreneurial daring contributed to the failures. Broadcasting is a prime example. In 1971 General Cinema bought control of a Miami TV station for a measly $2.3 million. Smith soon pulled together a set of radio stations in Boston and three other cities. In 1976, when General Cinema started reporting on broadcasting as a division, Smith waxed enthusiastic about the common thread of entertainment that linked his media and theater businesses. He hinted at future acquisitions. Then Smith's worship of value came to the fore. Between the mid-1970s and the early 1980s prices of radio and TV stations increased fivefold. Smith, being Smith, slammed his media strategy into reverse. General Cinema sold all its stations for $147 million and posted thumping after-tax gains of $83 million. Yet Smith had blown his chance to build a significant operation in a thriving industry, and thus to realize even more value. The radio stations he liquidated would sell today for at least twice as much as General Cinema got. Similarly, after picking up 4.3% of Columbia Pictures and a smaller bit of R.J. Reynolds, General Cinema sold its holdings for good profits shortly before their market values soared.

SMITH IS unlikely to repeat such mistakes in his deal with Carter Hawley Hale. In 1984 The Limited, Leslie Wexner's ravenous retail empire, tried to annex Carter Hawley. Smith rode to the rescue, buying 39% of the threatened company's shares for $300 million, his largest investment ever. Last December, Wexner made a second pass at Carter Hawley, offering $60 a share, effectively more than twice what Smith had paid. Instead of taking a $440-million profit, Smith paid out another $178 million, bringing General Cinema's ownership in Carter Hawley to 49%. It wasn't bidding fever that made Smith ante up. He recognized that the specialty-store division centered on Neiman-Marcus was Carter Hawley Hale's crown jewel and that it would shine more brightly if someone could pry it out of the crown. That would free Neiman from Carter Hawley's $1 billion of debt, allowing the glitzy chain to expand more quickly. By last fall General Cinema and Carter Hawley had nearly completed plans for a spinoff. Wexner's December attack helped activate the plans. Assuming shareholders approve in June, Carter Hawley will lose the 190 specialty stores and keep 114 traditional department stores, mostly in the West and South. Each share of Carter Hawley will entitle the holder to a share of Neiman-Marcus Group, plus $17 in cash. Security analysts estimate the package may be worth around $55, in addition to the value of a share in the shrunken parent company. Carter Hawley's stock is trading around $59, up more than 25% since the deal was announced. General Cinema gets 60% of the equity in Neiman-Marcus Group and retains a 12% interest in Carter Hawley Hale. The spinoff deal prohibits Smith from buying the rest of Neiman bit by bit in the public market. Instead he must tender for all shares, ensuring that General Cinema will pay a hefty premium to own its new business outright. Smith won't say when -- or if -- he'll make his move. For now he seems - interested only in offering financial and real estate advice from his seat on the new company's board, and in studying Neiman's operations. To learn more about the business, he has dispatched Richard Tarr, General Cinema's president, to finger the merchandise in Neiman-Marcus stores across the country, taking lessons from store managers on the subtleties of high-fashion retailing. NEIMAN-MARCUS GROUP seems to be such a plum that the most prudent investor would be tempted to swallow all of it. As a division of Carter Hawley, the group last year earned an estimated $116 million before taxes on sales of roughly $1.1 billion. Carter Hawley projects that the new company's earnings will grow at a blistering 26% a year through 1990. If Neiman-Marcus Group stock trades at 20 times earnings, as several analysts suggest it might, General Cinema's $473-million stake will be worth around $1.9 billion three years from now. That estimate could be low. Neiman-Marcus grew from seven stores in 1976 to 22 in 1985, when debt-ridden Carter Hawley throttled back. Carter Hawley had planned to resume expanding in 1989 by two stores a year. But Peter Siris, a security analyst with Buckingham Research, says that Neiman's peerless name and record justify doubling the planned rate of expansion. ''The country could easily support 75 Neiman-Marcus stores,'' he contends. In Siris's view, earnings could grow at over 30% annually, even with the costs of opening four stores a year. Smith will need more than the cash his own operations generate to buy the rest of Neiman-Marcus. He could use General Cinema's $700-million bank credit lines or perhaps sell his theaters to a major movie studio for $600 million or so. Smith also could liquidate his 8.5% stake in Cadbury-Schweppes, the British soft drink and candy maker. That could bring in $186 million. But he started buying into Cadbury just last summer and recently said he wants to increase his holding to as much as 25%. The 300-year-old company has superb growth prospects in lines of business that General Cinema knows well. Buying out Neiman and pouring money into Cadbury at the same time would certainly soak up all the excess funds Smith can find. Together, the two projects could easily absorb $1 billion. But sooner or later, given Smith's record, those businesses will produce tidal waves of dollars for General Cinema. For investors as canny as Smith, it seems, there's no escaping the pressure to find new ways of channeling cash.

CHART: INVESTOR'S SNAPSHOT GENERAL CINEMA SALES (LATEST FOUR QUARTERS) $999.1 MILLION CHANGE UP 2% NET PROFIT $88.5 MILLION CHANGE DOWN 2% RETURN ON COMMON STOCKHOLDERS' EQUITY 18% FIVE-YEAR AVERAGE 25% RECENT SHARE PRICE $51.25 PRICE/EARNINGS MULTIPLE 21 TOTAL RETURN TO INVESTORS (12 MONTHS TO 3/27) 7% PRINCIPAL MARKET NYSE

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