It was 1999 and on board were Steven Spielberg and Edgar Bronfman, head of the Seagram media empire. Above his head hovered Spiderman, swinging from a helicopter, as thousands of fireworks exploded to mark the opening of Universal Studios’ Florida theme park — then 50% owned by Rank.
But Smith wasn’t seduced by the razzmatazz. “I couldn’t help but think half of this expense was mine,” he said at the time.
Within months he extracted Rank from the joint venture. It was the start of a whirlwind 18 months in which Smith sold off a string of non-core businesses, including Butlins, Odeon cinemas and Pinewood Studios. He raised £1.5 billion, which was needed to reduce the group’s spiralling debt.
But six years later Smith’s revolution seems to have run out of steam. He gives the impression of a man under increasing pressure.
During his reign of almost six years Smith has outperformed the FTSE 250 index, but in the past 12 months Rank’s share price has fallen 11% while rival Hilton’s has soared 46%. Hilton is expected to announce upbeat results next week, with pre-tax profits of £383m, in contrast to Rank.
Advertisement
Last week shares in Rank closed at 289Åp, giving the leisure company a market value of £1.8 billion.
Smith may have reduced Rank’s debt mountain, but profit growth has stalled during his tenure. On Friday he will announce the company’s full-year results. Analysts expect a pre-tax profit of about £170m — just £62m more than the £108m reported during Smith’s first year.
So what is going on at Rank? The real interest on Friday will be in the outcome of a strategic review.
Many City analysts expect Smith to announce plans to demerge Deluxe, its film-processing unit, and sell the smaller Deluxe media business. Merrill Lynch, the investment bank, believes a sale and demerger could generate up to £750m for Rank shareholders.
Nigel Parson, an analyst at Williams de Broe, said: “We expect Rank to announce the demerger of Deluxe at its prelims. This should be an important catalyst to realise value.”
Advertisement
The demerger of Deluxe would mark the end of the group’s days as a conglomerate, leaving Rank focused on two core businesses.
The first is the gaming division, which owns Grosvenor Casinos, Mecca Bingo and Blue Square, the internet bookmaker. The second is Hard Rock, which owns restaurants and hotels around the world.
“Without Deluxe, Rank becomes a stable, cash-generative business centred on bingo, with its loyal customer base, and casinos,” added Parson.
But many City analysts also believe that it could mark the end of Rank as an independent business.
The Deluxe business, which makes and distributes film for the leading studios, has long been considered a “poison pill” — blocking any takeover bid for Rank.
Advertisement
Not only is the business volatile, there is also a “change of control” clause that allows the studios to renegotiate their contracts in the event of a takeover.
One private-equity executive who looked at Rank last year said: “The problem with Rank has always been valuing the cashflow from Deluxe. The business has always been dependent on a couple of blockbuster hits.”
Simon Champion, an analyst at Deutsche Bank, believes that once Rank has demerged Deluxe, the group will be an attractive proposition for private-equity bidders. “Expect a cash-generative Rank to be closely scrutinised by those more familiar with aggressively leveraged structures,” wrote Champion in a recent note.
For private-equity bidders, Rank has the added benefit of an extensive portfolio of freehold property.
Nigel Hicks, an analyst at Cazenove, believes that the 60 freehold bingo clubs could be worth up to £600m.
Advertisement
“A key attraction for any financial buyer is the undervalued balance sheet. Property assets are in the balance sheet at cost,” said Hicks.
Even one of Rank’s own advisers refuses to be drawn on the chances of the group remaining independent.
For Smith, a break-up of Rank would not only cost him his job, it would also leave unfinished business.
When he arrived — the third chief executive in four years — he set out to reduce the spiralling cost base and pay down the debt pile of more than £1 billion that had been run up by his predecessors.
Having succeeded, he had hoped to transform the group. But he missed out on the auction for Coral. It was a failure that friends say has haunted Smith. Since then he has had to rely on organic growth from Rank’s ragbag of mature businesses to boost profits.
Advertisement
Smith has also felt bruised by the highly political battle over the deregulation of gaming, which threatens to hand an advantage to foreign incomers.
But with bidders circling the company, Rank shareholders must hope that the Smith of old — the Smith who stood on a boat with Spielberg and counted the cost of the fireworks — can deliver for his investors.