Tuesday, February 12, 2008

Sky City Cinemas no Blockbuster

Sky City Entertainment Group Li (SKC.NZ)

Sky City Entertainment's share price took a 9c drop today on news that it was writing
down its cinema division by NZ$ 60 Million.

The announcement today of a write down in the value of Sky City Entertainment Group [SKC.NZ] division has been a long time coming and is probably the only positive decision that management have made in a long while.

The loss has finally been realised-a NZ$60 million write down- and an extremely bad decision years back to buy this pig of an asset for an over inflated sum has been dealt with. A shame though that the only casualty of that bad decision was Evan Davies, the CEO who was sacked last year. Members of current management clearly need to fall on their swords over this latest waste of shareholder cash.

That ain't going to happen in this day and age of buck passing though.

I have been bitching and moaning about the cinema business since it was bought many years ago.

I loathe the cinema business, long-term it doesn't make money and is subject to continual capital expenditure due to changing technology and fierce competition, from not only other cinema operators, in a saturated multi-screen race to build more seats, but from many other sectors of the entertainment industry.

Those faceless suits at Sky City should have known these facts and run kicking and screaming along with shareholders checkbooks, from any such wrong headed deal.

The cinema business must be sold, it has over 100 screens and has 10 screens in limbo at the moment at the new Albany Westfield Mall, pending a possible sale.

The write down today values the cinema assets at around $50 million but it is highly unlikely that it is worth that much to a potential suitor.

There has been talk of Hoyts buying the cinema company but I don't think that could possibly happen given the dominance it would give a combined company in the current market.

It is more likely a company like Berkely or Reading Cinemas would be a better fit given their relatively small sizes.

Sky City have had a turbulent preceding 12 months and still have a number of issues to deal with in the future. The company have just started proceedings against the South Australian State Government, in tandem with the TAB, because the State has reneged on a contractually agreed limit in charges and taxes when they sold the Adelaide Casino to Sky back in 2000.

The 2008 General Election in New Zealand is also likely to be of great interest to shareholders as well, If the Labour/Green nanny statists get re-elected, further regulation against perceived "harm" to casino customers and higher gaming taxes are a likely scenario.

All this turbulence makes the job of new CEO Nigel Morrison all the more challenging when he takes up his position at the end of March 2008.

The half year profit is announced on 25 Feb and will include the cinema write down in its figures. Dividends will not be affected.

Sky City Entertainment shares were down more than 2% today (FEB 12, 5.00pm NZ time) on low volume.

Disclosure: I own SKC shares in the Share Investor Portfolio

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