Can Alamo Drafthouse Battle Back From Bankruptcy and Lead a Moviegoing Revival?

Alamo Drafthouse was riding high.

The Austin, Texas-based theater chain had managed the difficult feat of expanding its footprint nationally, popping up in major metropolises such as New York and Los Angeles without losing its indie spirit. Its unabashed love of all things cinema, menus crammed with craft beer and locally sourced snacks, and themed events with A-list talent like Wes Anderson and Rian Johnson made Alamo the envy of the exhibition industry. And then in March 2020, disaster struck. The coronavirus pandemic forced the chain to shutter its 41 locations and furlough 80% of its 6,000 employees.

“You can’t save your way to success during a pandemic,” says Shelli Taylor, Alamo Drafthouse CEO. “That’s a great tool when you have revenue coming in the door, but when there’s no revenue there is no saving. So what do you do?”

In early March, unable to continue servicing its $105 million in long-term debt, Alamo filed for Chapter 11. Its investors claim that the company will reemerge from bankruptcy with a cleaner balance sheet, one that will allow it to capitalize on a revival in moviegoing that Hollywood expects will unfold as COVID-19 starts to fade and vaccinations continue to rise.

“I’m not carrying the stigma of the big ‘B’ bankruptcy word,” says Tim League, the company’s founder and executive chairman. “It’s not the kind of bankruptcy of fire sales and total failure. Chapter 11 was created for businesses that were profitable, and have a means to become profitable again, but were subject to circumstances that put them in temporary financial difficulties. It’s specifically for good businesses to ride out the storm and come back strong.”

Alamo’s challenges mirror those of the entire cinema industry, which has just endured the most punishing 12-month stretch in its century-long history. Can it put its financial house in order while recapturing its pre-pandemic swagger? Will it be able to successfully remind customers of the fun they once had sipping a microbrew and munching on truffle popcorn while watching the latest Tarantino flick? Are its customers so eager to go out and socialize after a year of being housebound that they’ll see anything and everything that hits the big screen, or will COVID-19 prove to be the final nail in the coffin of the theatrical experience?

“The Alamo news was a shot in the gut,” says Jeff Bock, a box office analyst with Exhibitor Relations. “This was a company that seemed to be doing everything right. If they filed for bankruptcy, it meant no one was safe. Film distribution is a precarious, low-margin business and it’s probably going to continue to be that way over the next few months or even years as we ride the wave of consumer confidence.”

Last year, that wave was a ripple, one that left cinemas adrift and wondering how to move forward. With theaters closed for months or operating at reduced capacity, and studios delaying most of their major blockbusters, global box office receipts plunged 72% to $12 billion. Top chains and indie theaters alike were awash in red ink — AMC Theaters, the world’s largest exhibitor, lost a stunning $4.6 billion in 2020 due to COVID-19, while Cinemark, another major chain, lost $618 million.

Cinema operators, at least the ones who have managed to stay in business during the pandemic, believe that salvation is at hand. They point to the recent record-breaking box office receipts in China, where the virus is under control, as evidence that people are desperate to return to theaters.

“People crave normalcy,” says Richard L. Gelfond, CEO of Imax. “When things feel safe, they want to go back to the movies in record numbers. It’s a false narrative to suggest that people might not come back. We’ve already answered that question in places like China.”

In the case of Alamo Drafthouse, the chain filed for Chapter 11 as a condition of bringing on a new equity partner: Fortress Investment. As part of the plan, Altamont Capital, which has been one of the company’s backers since 2018, will reinvest, as will League, though his equity position will be diminished once the company reemerges. League insists that both private equity firms are in it for the long haul — they’re not just looking to get a distressed asset at bargain-basement prices and sell it for parts.

“They’re investing in a company that they believe in,” says League. “They’re looking to see us survive and thrive and continue the work we’re doing.”

Of course, bankruptcy carries risks. There’s the possibility, for instance, that the group League assembled could be outbid by other investors during the auction they intend to hold as part of the Chapter 11 process. That would leave the future of the company out of League’s control. However, experts say that, on paper, Alamo’s Chapter 11 plans appear smoother and better thought out than other media bankruptcies (think Relativity or Global Road, both of which suffered from chaotic attempts to get their financial houses in order).

“It’s unusual to see the original investors buy back into the property in this way,” says Zev Shechtman, a partner at law firm Danning Gill. “It seems like the reason they’re doing that is they believe in the business, have an emotional attachment to it and believe they can make it succeed again.”

By going into bankruptcy, Shechtman notes, Alamo can get out of some onerous leases that were burdening the company with debt. As part of the plan, the theater chain will close two underperforming venues in Texas and one in Kansas City.

“For 15-plus years we’ve made every payment on time, and now all of a sudden we’re in a bad spot,” says Taylor. “Some vendors have been great about helping us try to figure out a solution, and some of them just don’t care. They need their payment and it’s our problem and not theirs. I logically don’t understand that.”

League had tried to avoid going the bankruptcy route. Over the winter, Alamo sought to renegotiate its debt with Bank of America and other lenders but found it could not reach a deal that would provide the capital needed to keep operating. Investors, League says, were wary of getting involved in the exhibition business when its future was shrouded with uncertainty.

“We were having a lot of discussions with folks, but the reality was we had too much debt and needed to figure out a way through it,” says League. “It was not that easy in December to get anybody interested in investing in cinemas. You have to get through the bad times and start operating again and start that path toward normalcy. Then people may be interested in reinvesting in cinemas.”

For more than two decades, League has operated Alamo with a kind of missionary zeal, preaching the gospel of celluloid magic. As the major movie chains gobbled each other up and the exhibition landscape became more corporatized and conglomerated, League cut a different path. While these chains focused on commanding as many multiplexes as they could to sell as many tickets to the latest Hollywood blockbusters, Alamo embraced cult favorites as well as indie and foreign-language fare. It leaned into customer service and guest experience; in place of tubs of popcorn and oversize sodas, its full-service menu boasted burgers and pizza, craft beer and cocktails. Most movie theaters in the early aughts had all the intimacy and character of a big-box store, but Alamo’s cinemas were different. League, an inveterate collector, used the venues to display his treasure trove of classic movie posters. He would also fill the theater bars with curiosities ranging from the wax models of medical abnormalities that line the watering hole of its Brooklyn venue to the vintage printing press scheduled to adorn its upcoming lower Manhattan showplace.

“It’s like a party,” says Rian Johnson, the director of “Knives Out.” “There’s something unstuffy and everyone is there to have a good time.”

League’s life in movies started modestly enough. He was an engineer by training, but, dissatisfied with his career at Shell Oil, he began daydreaming about a way to get into the film business. After a failed attempt to create a cinema in a run-down part of Bakersfield, Calif., an effort that collapsed in part over his inability to get a liquor license, League and his wife, Karrie, moved back in with her parents. They set about raising money for a new theater in Austin, which was then on the cusp of becoming a mecca for artists, hippies and other denizens of the outré. Finding a parking garage in Austin’s warehouse district that League thought could work as a theater, he cobbled together $250,000 in working capital. His in-laws mortgaged their house; he borrowed money from his father and mother and racked up tens of thousands of dollars in credit card debt.

Early on, League developed a policy that would become a staple of the Alamo experience. He was offering a special on Pabst Blue Ribbon during a screening of “Blue Velvet” when he noticed the audience was getting rowdy and talking back to the screen. That weekend, using Final Cut Pro, he pieced together a pre-show message informing the audience that neither talking nor texting would be tolerated, and violators would be tossed out.

“It became part of our identity to signal that this is a sacred space,” says League.

The theater quickly became one of the fastest-growing brands in movies. Using a franchise model, Alamo rapidly expanded its screen count and saw its national profile rise as well. Before COVID-19 shook up its business, Alamo was averaging eight new locations annually. But League says he was able to keep the brand from feeling too corporate by empowering the creative managers — giving them license to put their own imprint on operations.

“We want our culinary teams to engage with local vendors and we have someone whose job it is to engage with community relations,” he says. “We’re undeniably a chain, but the idea was to expand and not feel like a chain but more like a loose network of neighborhood and community theaters that have some oversight to make sure that we’re all marching in the same direction.”

Customers loved what League was selling. In 2019, a year that saw the domestic box office fall 4%, Alamo’s revenues rose 5%, showing that it could still grow even as the overall business constricted.

League wants to recapture that momentum. Last year, he brought in Taylor, a former Starbucks executive who had helped oversee the coffee giant’s expansion in China, to help Alamo grow. Even though the exhibitor is shuttering some of its venues as part of the bankruptcy, League says Altamont and Fortress are committed to helping the chain continue to find new cities to plant its flag. And he thinks the pandemic will give him some opportunities to get bigger.

“That’s the next chapter — Chapter 12, you can call it,” says League. “There are going to be quite a few theaters that do shutter, probably the neglected theaters of certain circuits, and what that’s going to do is open up new opportunities and holes in the market for us to take advantage of.”

People may be ready to return to the movies when COVID dissipates, but even as Alamo and other theaters prepare to welcome back customers, they face a very different landscape than the one they operated in before the public health crisis hit. With the pandemic keeping theaters closed, studios, which had long bristled over the amount of time they had to keep movies exclusively in cinemas, searched for alternatives. Many of their solutions could shrink that theatrical window to a couple of weeks from the typical 90 days that was the standard before the coronavirus.

Universal Pictures, for instance, signed a deal with AMC, Cinemark and others that cut them in on a percentage of home entertainment revenues in exchange for letting the studio release its movies on demand within 17 days of their debut. Paramount has offered a 45-day window, while Warner Bros. opted to debut its entire 2021 slate on HBO Max at the same time they screen in theaters, something it has said is a temporary state of play. Still, it’s unclear what the new rules of the road will be when things start to get back to normal.

“Theatrical release windows and strategies will be different than they were before the pandemic,” says John Fithian, head of the National Assn. of Theatre Owners. “But pandemic release models are pandemic release models. People in our industry understood that in order to get movies in theaters, release models had to be different because studios had to monetize their content. But what these new windows will look like going forward will be a topic of discussion.”

League isn’t overly concerned with the prospect of keeping movies in theaters for shorter periods of time. Alamo hasn’t signed on to the Universal proposal, but the theater chain says it’s willing to talk with the studio and its brethren about finding some sort of compromise. And Alamo is willing to listen, particularly if it can share in the home entertainment revenue.

“It’s a time of experimentation,” says League. “For blockbuster Hollywood movies, I want to see an exclusive window for theaters, but I think we can work within a shortened window. It’s inevitable that will happen. I go into those conversations with a spirit of partnership. Studios are the ones spending the money on a billion-dollar movie, but I’m a strong believer that our theaters can play a huge part in recouping that investment.”

With New York City and Los Angeles giving the greenlight for cinemas to reopen, most major centers of moviegoing have returned. The box office, though still a fraction of what it was pre-pandemic, has begun to slowly shake off its torpor. But exhibitors are still facing some fierce headwinds. In many cities, public health requirements mean that theaters can operate at only 25% capacity, making it nearly impossible for them to turn a profit. Plus, rates of infection have plateaued but remain at high levels, which could make some customers hesitant to buy tickets. Cinemas point to the new safety and cleaning measures they’ve instituted, but many theater operators believe that they need to make a more concerted public relations push to remind customers what they’ve missed about the big-screen experience.

“The question is how quickly can we turn the corner in terms of really getting the public aware that moviegoing has returned and there are films they want to see,” says Greg Laemmle, owner of Laemmle Theatres, a chain of art-house venues in California. “Hopefully they can increase the capacity restrictions so the path to profitability for exhibition is there.”

Of course, it will be hard to get people excited to see movies again if there aren’t exciting movies for them to go see. For much of the past year, studios have been pushing, postponing or indefinitely delaying their films, frightened of releasing them when so many theaters are closed or operating at just a fraction of their capacity. Last week, Marvel opted to move “Black Widow” from early May to July 9, and announced that the film would also debut for $30 on Disney Plus. The decision was a blow to exhibitors, who hope that’s the last big, splashy popcorn flick to get delayed. They’re banking on other blockbusters like “Fast 9” and “Top Gun: Maverick” to move forward with plans to open this summer so that there’s more to play on screens than just Netflix movies and “Tenet.”

“We need to have the slate stick,” says Taylor. “For the first time since I joined Alamo it looks like movies may move a couple of weeks, but we’re not looking at them moving whole quarters or a year. That’s really critical because it will give the moviegoers hope and it will give us hope and we’ll want to open more theaters.”

Even when major movies open, analysts think that it will take time to dig out of the financial hole left by COVID. The box office could start to rebound this summer, but some experts believe that attendance won’t go back to pre-pandemic levels for at least another year.

“We’re going to crawl and then we’re going to walk and then we’re going to run,” says Fithian. “It will be into 2022 before we see a return to normalcy in box office.”

Studios have used the pandemic to experiment with how to release and monetize the movies they make, but theaters have also attempted to find new revenue streams. Many, including Alamo, have offered private theater rentals, allowing patrons to reserve a screen for their friends and family as a way of ensuring they won’t be exposed to COVID. They’ve also experimented with video on demand, offering their customers a chance to rent new movies through their proprietary websites. Many of these advances could outlast the pandemic — some may even provide meaningful new sources of profits long after the coronavirus has faded from memory.

Ultimately, convincing people to head to a theater near them will involve giving them something they can’t find on the panoply of streaming services that have thrived during the COVID era. To that end, Alamo has tapped into the sacred cinematic tradition of “let’s put on a show” to create programming that can only be found on the big screen. This month it is hosting a virtual “Lord of the Rings” reunion of director Peter Jackson and Middle-earth vets like Cate Blanchett, Ian McKellen and Elijah Wood that will accompany a screening of a remastered version of the trilogy. It is also hosting “Dazed and Confused” screenings with director Richard Linklater and the film’s original cast. Both reunions will be prerecorded and made available for free to any cinema in the world as part of a program that League has christened “Support Local Cinemas.”

“We see it as an all-ships-rise environment right now,” he says.

Of course, the Alamo founder is embarking on this big push while his company prepares to enter bankruptcy, an experience that will determine the destiny of the iconoclastic chain. But it also signals that as long as League is at the helm, certain foundational principles will remain.

“We’re not going to change the core of who we are,” League says. “The programming will continue. The whimsy of the experience will continue. The core reasons why we exist and why Karrie and I built the damn theater in the first place are still there. No talking. No texting. Great beer, great food, great sound, great picture. We’re going to keep on doing what we’ve been doing for nearly 25 years.”

Correction: An earlier version of this story misstated Paramount’s theatrical window.