Financing an Extraordinary Dividend at Regal Entertainment Group

In early May 2003, Michael Campbell, co-chairman of the board of directors and co-CEO of Regal Entertainment Group, the world’s largest movie theater company, was considering a very unusual financial decision—paying an extraordinary cash dividend of $700 million, or $5.00 per share, to Regal’s shareholders. Regal’s stock was trading over $20 per share with 136.9 million shares outstanding, for a total market capitalization of about $2.8 billion. The proposed dividend would thus be in excess of 25 percent of the company’s market capitalization. Regal had the opportunity to reward shareholders with this extraordinary dividend because the company was relatively underleveraged. Regal planned to finance the dividend through a combination of bank debt, convertible securities, and/or high yield bonds. Equity analysts on Wall Street had word of the contemplated dividend and were surprised by its sheer magnitude. They expressed concern that funding such a large dividend would significantly increase the interest expense, causing a reduction in earnings per share. One Wall Street analyst argued that the dividend was unfavorable because it would “reduce the company’s financial flexibility.” Others were more supportive and believed the payout to have tax benefits for shareholders with limited impact on the company’s financial performance. Such a large one-time dividend had never before been attempted in the company’s history. Campbell’s next step was to decide how best to finance the dividend, keeping in mind the effects of each financing option on shareholder value.