Cineworld [LSE:CINE], might be close to a breakthrough in trying to find a buyer, as news filters out that competitor, Vue had secured financial backing to make a bid for the embattled cinema chain.
This would be a big deal for Vue, currently the UK’s third cinema chain behind Cineworld and Odeon, the subsidiary of AMC Theatres [NYSE:AMC]. According to various press reports, Barings and Farallon Capital Management have agreed to provide funds to Vue for ‘strategic acquisitions’.
If a deal goes through, Vue would become the UK’s largest cinema chain. Vue remains in private ownership and is supported by the Canadian pension funds Alberta Investment Management Corporation and Ontario Municipal Employees Retirement System.
Cineworld’s short revival
Shares in Cineworld jumped over 20% yesterday (14th February), although that will be cold comfort to long-term stockholders who have seen Cineworld’s share price decline by more that 85% since it entered Chapter 11 bankruptcy proceedings in the US in August 2022.
Cineworld’s shares opened trading today at 5.01p today, up 40.4% from the beginning of the year but down 87.4% over one year with its shares ranging between 1.8p to 42.4p over a 52-week period.The company has a current market capitalisation of GBP71.4m and was trading as high as 318p in April 2019.
It is ironic, given the Canadian-backing for Vue, that the final nail in the coffin for Cineworld was its ill-fated attempt to buy Canadian cinema operator, Cineplex [TSE:CGX] for USD 2.1bn in 2020. The company raised a lot of debt to buy Cineplex.
In the end it had to retreat from the Cineplex deal, which may still leave it with a bill of up to USD1bn. It also used debt to acquire Regal for USD3.6bn in 2017. All-in the company has a net debt pile of around USD8bn and in a bankruptcy, creditors are first in line, ahead of equity shareholders, so any rescue would wipe out the value of any equity.
Perfect storm
A perfect storm combination of factors: the Coronavirus pandemic forcing it to close cinemas during lockdown; a change in the nature of entertainment consumption from its customers – with many opting to ‘Netflix and chill’, preferring to stay at home, rather than go out for a cinema experience; rising interest rates, and the cost-of-living crisis, forcing families to limit their entertainment expenditure; meant that Cineworld couldn’t make its repayments and was forced into bankruptcy proceedings.
The cinema chain found itself a target for short-sellers soon after the Cineplex deal fell through and investors shunned the stock.
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The Canadian angle continued to play strongly in Cineworld’s subsequent story. In September the cinema chain announced it was in discussions with Cineplex to merge, but these discussions eventually came to nothing.
Last month, Cineworld announced that it wasn’t going to entertain an asset-strip, and was seeking to sell its business as a whole entity. Cineworld operates over 700 sites across the globe, including over 100 in the UK and Ireland. Although shares fell on this news, the potential Vue deal might be the solution that both parties are looking for.
Deal or No Deal
Should this deal not go through, things are looking pretty bleak for Cineworld, as it is rapidly running out of credible buyers that would be able to absorb the whole corporate entity, despite reporting in January that it had reached out 30 potential acquisition partners. The cinema chain said it was closing a further 39 North American venues, on top of the 12 that have already shown their last movie.
Press reports allude that as well as a potential deal with Vue, there are other bidders hiding in the shadows ahead of a deadline for bids set by law firm Kirkland & Ellis LLP, a bankruptcy expert and Alix Partners, a management consultancy specialising in corporate turnarounds, later this week.
The positive news has sparked an interest in the company’s shares, and looking at the long-term its shares are historically cheap, so some investors are starting to consider the company as an addition to their portfolios. Yes. There may be some (very) short-term, momentum-trading opportunities to profit. However, this could well turn into a classic value trap, as even from 5p, there still is room to fall – and given the massive debt burden, once creditors (and advisors) are paid off, there won’t be much left over for shareholders.
