Making Money Off Making Movies

Booze, Popcorn, and Recliners Draw People to Theaters

The Post-Pandemic Rebound Makes These Bonds Less Risky

Welcome to Porter & Co. Distressed Investing, edited by Wall Street’s Dean of High Yield, Martin Fridson.  At the end of today’s issue, we’ve included a guide on how to purchase our recommended bond through several reputable brokerages. For general information on bonds, please refer to our Startup Guide. To learn how distressed bonds like this one help us take advantage of “The Greatest Legal Transfer of Wealth in History,” see the complete Guide to Distressed Investing on our Reports page. In addition to hosting Distressed Investing on our website, we also make it available as a downloadable PDF on the Issues & Updates page here.

Earl Hulsey was deeply ashamed.

For months, he stayed quiet about the unexpected $1 million wire transfer that had hit his bank account. (That’s in 1919 dollars – so, around $18 million today.) He didn’t want to talk about the fact that he’d given up on the movie business. He’d sold out.

Even more painful, he’d surrendered to his archenemy… the “Dynamite Gang.”

A vaudeville impresario who’d started his career in 1914 as the ringmaster at “Hulsey’s Hipp,” short for Hippodrome, Earl felt most at home in the world of dancing seals and ten-penny magic shows. But – seduced by the brave new world of moving pictures – he’d opened a movie theater in his hometown of Waco, Texas… then another, and another. By 1918, he was managing a chain of over a hundred movie houses across Texas, Oklahoma, and Arkansas… and struggling with an increasingly heavy debt load.

Then the pandemic hit.

The Spanish Flu of 1918 was a genuine catastrophe. Fifty million people – a tenth of the world’s population at the time – succumbed to the viral plague, which hit hard on the heels of the “Great War” to decimate an already weakened population.

News reports from the time show an eerie similarity to the COVID-era dictums: practice social distancing, shelter in place, spray antiseptic, and if you must be out in public, wear a cheesecloth mask (which, as one moviegoer of the time complained, “interfere[d] to a considerable extent with cigarette smoking”).

The flu interfered with public life in general – and, in another eerie preview of COVID, the fledgling cinema business tanked. From 1918 through 1920, when the final “fourth wave” of the flu dissipated, between 80% and 90% of picture shows were shut down for months at a time, wiping out $40 million (again, in 1919 dollars) in annual revenue and putting thousands out of work. Without big-bank backers, movie houses like Earl Hulsey’s – and hundreds of other modest mom-and-popcorn outfits across the nation – were hit hard.

That was when the “Dynamite Gang” struck.

Heading up the gang was 5-foot-5, bright-as-a-Klieg-light Adolph Zukor. Zukor had sewed some cash into his coat, hopped on a boat, and emigrated to America from Hungary in 1891, and then worked his way up through the fur trade and the penny-arcade business. Now he owned an up-and-coming motion-picture production and distribution company, Famous Players (later Paramount Pictures) – and he was determined to make it the only game in town.

Famous Players was the very first movie outfit to secure backing from a major financial firm ($10 million from investment bank Kuhn, Loeb & Co.), and the only one with an exclusive contract with superstar Mary Pickford, “America’s Sweetheart.” Zukor was poised for success – but there was a fly in the grease paint.

Like A Wrecking Ball

That irritant was First National Pictures, a loose federation of about 600 independent movie houses that formed in 1917 (largely as a reaction to Zukor’s empire) and grew across much of the American South. Crucially, First National – where Earl Hulsey served as a board member – refused to distribute Zukor’s movies, which he marketed as a package deal: if you wanted Mary Pickford, you also had to buy the 50 other pictures Zukor produced that year, sight unseen. 

The feud between Famous Players and First National, called “The War of the Theatres” in the press, reached a fever pitch… and then, in 1918, America broke out with actual 104-degree fevers.

When the pandemic crippled the small First National theaters, Hulsey and his friends saw empty seats and a barren box office, Zukor saw opportunity…

Gathering a group of business partners he called the “Dynamite Gang” or the “Wrecking Crew,” Adolph Zukor traveled across the south buying up struggling theaters at a record clip. If the owner wouldn’t sell, Zukor would build a bigger, flashier Famous Players theater across the street and siphon away business until his competitor capitulated.

In 1919 alone, during the worst months of the pandemic, Zukor snapped up 135 theaters across the south… effectively kneecapping First National’s resistance (and setting himself up for a series of extended antitrust lawsuits that wouldn’t be fully resolved until the 1940s).

Earl Hulsey (in true Texan form) was one of the last holdouts. Zukor bought up a few of his hamstrung theaters – and then, in a bold move, wired him an unsolicited $1 million payment for the rest. Humiliated, Hulsey turned over his entire theater chain to Zukor… and didn’t talk about what he’d done with anyone for several months. In a semi-happy ending, though, he returned to his vaudeville roots and emcee’d at Hulsey’s Hipp – which remains an iconic Waco arts hub more than a century later.  

As for Zukor, he went on to develop the now much-larger Famous Players into movie giant Paramount Pictures, a production-distribution juggernaut that single-handedly birthed the modern studio system. (It also gave us towering classics like The Ten Commandments, Breakfast at Tiffany’s, and The SpongeBob Movie: Sponge Out of Water.)

Zukor used the pandemic as an opportunity to buy up rivals, consolidate, and strengthen his business – and that, as you may have guessed, is the strategy pursued (successfully) by the movie company whose bond we’re examining in this issue.

The largest movie theater operator in the world, this business was hit hard by the pandemic, with revenue and profits plunging as it was forced to have its thousands of theaters go dark. But with sound management and a nice cache of cash, the company brought innovation to the cinema business, while also buying up some of the distressed movie houses that could not handle the severe downturn.

Forging a Path to Success