HICKS MUSE PULLS OUT OF DEAL TO BUY UA THEATRES.

Byline: Daniel Dunaief Bloomberg News

Hicks, Muse, Tate & Furst Inc. scuttled its agreement to buy United Artists Theatre Group for $850 million in cash and stock from a Merrill Lynch & Co.-led investment group.

Hicks Muse said the decision won't affect its agreement with fellow buyout firm Kohlberg Kravis Roberts & Co. to buy Regal Cinemas Inc. for $1.5 billion and combine their movie chains. That would create the world's largest theater operator.

Hicks Muse didn't say why it ended the transaction. The problem, analysts said, may stem from the amount of investment needed to make United Artists' older chain of theaters more competitive with the larger multiplexes opening across the country.

``United Artists is a property that needs a lot of work,'' said Arnie Ursaner, an analyst at CJS Securities.

United Artists said it will refinance its capital to lower borrowing costs and that its cash flow has improved. Officials and spokesman for Hicks Muse, United Artists and Kohlberg Kravis didn't return telephone calls seeking comment.

CNBC, which first reported the transaction's problems, said the deadlock began over price given United Artist's performance in 1997 and projections for 1998. It cited unidentified people close to the situation.

The purchase was originally announced in November.

The investment firms said Jan. 19 they planned to join for the first time to buy Regal and fold it into New York-based KKR's Act III Cinemas and Hicks Muse's UA. That combination would have made the resulting company twice as big as industry leader Carmike Cinemas.

Regal, considered by many the industry's best-managed chain, fits the buy-and-build strategies of KKR and Hicks Muse. Both companies, which were attracted to Regal for its rising earnings, plan to use it as a base for further expanding in the fragmented theater industry, analysts say.

Investment firms are attracted by the theater industry's steady growth and predictable profits.

Englewood, Colo.,-based United Artists has about 2,200 screens at 340 locations in 26 states. The company reported a loss of $13.2 million in the first half of last year on revenue of $229 million.

``UA had some older properties and if during due diligence they uncovered something that required more attention, I wouldn't be shocked,'' Ursaner said.

UA's losses and debt have made it difficult for the company to invest in new theaters with multiple screens, analysts say. United Artists has an average of six screens per location, which is above the industry average but below other more aggressive chains such as Regal, which averages nine, said Scott Barry, an analyst at Raymond James.