Cineworld LON:CINE, the second largest cinema chain (after AMC Theatres NYSE:AMC) shares have taken a Thelma and Louise-style dive since the beginning of the year. But with news that it is preparing to file for Chapter 11 bankruptcy in the US, and insolvency in the UK, it looks like Cineworld will suffer the same fate as Apollo Creed as opposed to Rocky Balboa, and not make it out of the ring.
Shares opened trading today (22nd August) at 4p, down from 21.5p at the start of last week and down 87.6% from the start of the year, offering a -93.6% one-year return, ranging from 1.8p to 85.16p over 52-weeks. The company’s market capitalisation this morning was GBP55.9m.The company has been viciously attacked by short sellers over the last year, and with nearly 150 million shares on loan, the potential for even greater falls is scripted.
The London-headquartered cinema chain has engaged law firm Kirkland & Ellis LLP, a bankruptcy expert and Alix Partners, a management consultancy specialising in corporate turnarounds to help it navigate the next few months.
This morning the company published a statement on the London Stock Exchange in an attempt to stem the bleeding. The company said: “Cineworld and Regal theatres globally are open for business as usual and continue to welcome guests and members.”
Cineworld Chapter 11 filing
“The strategic options through which Cineworld may achieve its restructuring objectives include a possible voluntary Chapter 11 filing in the United States and associated ancillary proceedings in other jurisdictions as part of an orderly implementation process. Cineworld is in discussions with many of its major stakeholders including its secured lenders and their legal and financial advisers,” said the statement.
Chapter 11 bankruptcy proceedings in the US is quite a complicated process, but in brief it gives the company filing a bit of time to restructure and reorganise its affairs and try to turn the company around by talking to new creditors and investors and running its existing operations – so in this case Cineworld can keep selling movie tickets and hot dogs.
However, creditors do have a significant say in the business’ affairs and can approve or veto the company’s restructuring proposals. Often creditors will work with their debtors to find an amicable working solution, as in the case of Chapter 7 bankruptcy proceedings, the business is closed, stops operating and all the business’ assets are liquidated, and debtors have to join a queue to try and get some of their money back. Chapter 11 either ends in Chapter 7, reorganization or a dismissal of bankruptcy proceedings. However, coming out of Chapter 11 often means that the company will have difficulty raising new debt in the future.
The statement continued: “The strategic options through which Cineworld may achieve its restructuring objectives include a possible voluntary Chapter 11 filing in the United States and associated ancillary proceedings in other jurisdictions as part of an orderly implementation process. Cineworld is in discussions with many of its major stakeholders including its secured lenders and their legal and financial advisers.”
“Any such filing would be expected to allow the group to access near-term liquidity and support the orderly implementation of a fully funded deleveraging transaction.”
Cineworld’s biggest problem has been debts of USD 4.8bn (GBP4bn), which its has not been adequately able to service post-pandemic, issues exacerbated by the cost-of-living crisis, as families pare back their luxury spending and a night at the movies morphs into a night in front of Netflix NASDAQ:NFLX.
Many of Cineworld’s problems have been of its own making. The company raised a lot of debt to acquire competitor Regal for USD3.6bn in 2017 and tried to buy Canadian cinema operator, Cineplex for USD 2.1bn in 2020; a position the company has had to retreat from, which may still leave it with a bill of up to USD1bn.
In February, Cineworld pushed back payments of around GBP125m it was supposed to make to Regal shareholders following a ruling that the USD23/share price it was paying to acquire the US cinema chain was not fair. The same month, Cineworld obtained undertakings to waive off any default arising from non-payment of dues to creditors, including holders of its guaranteed convertible bond due 2025.
Cineworld shut its cinemas in the UK in March 2020, making around 800 of its staff immediately redundant and retaining employees that had more than three years’ service on 40% of their wages – something employees groups said meant they were not able to afford the essentials of food and housing. The company was able to reopen temporarily in July 2020 in England and in August in Ireland, Scotland and Wales, but with much reduced content, and then had to close again in October of the same year. Cineworld reopened its cinemas again in May 2021.
The Netflix Effect
A big part in the horror movie script of Cineworld’s downfall has been its arch-nemesis, Netflix and other villainous streaming services. Viewer habits were changing before the Covid-19 pandemic, but during lockdown the fact that families across the globe were forced to come together on the sofa to watch movies, as opposed to make a night out of it by going to the cinema, holed Cineworld and its peers below the water line when they reopened their theatres. The acceleration from big screen to small screen has been seen globally, in disparate markets like the US, Europe and home of Bollywood, India, and Netflix and other streaming services have been investing heavily in production.
The swiftness of films going from cinema to home has also accelerated, with some blockbusters from the world’s biggest studios being streamed and released in theatres simultaneously – one of the most notorious being Disney NYSE:DIS releasing the Marvel superhero movie Black Widow online and in theatres at the same time in July 2021, which prompted its star, Scarlet Johansson, to sue her employer over loss of earnings.
With the wealth of legal and semi-legal streaming services allowing consumers to watch the latest movies for a much smaller cost in the comfort of their home – a trip to the cinema has become prohibitively expensive to many families in the last few years making it a ‘special’ outing as opposed to a regular pastime – Cineworld has had a difficult time tempting customers out since it reopened its premises.
Blockbuster failure
Cineworld hoped that once production studios got back on set, that a slew of blockbusters, bottled-up by lockdown, would have people flocking to their cinemas. Unfortunately this year titles including Thor: Love And Thunder, Top Gun: Maverick and the latest James Bond film, No Time to Die, have not performed as well as expected and according to Cineworld there has not been enough volume of content to maintain footfall.
Susannah Streeter, senior investment and markets analyst for Hargreaves Lansdown said: “…the UK company which owns movie chains around the world was desperate for a slew of hits to help revive its fortunes, but they have been few and far between. Hopes had been raised that first spies, then superheroes, then fighter pilots would prove to be the magic bullets for the company but there simply haven’t been enough blockbusters coming through to break the spell of misfortune.”
Cineworld has 9,189 screens across more than 750 sites. It operates in ten countries, including the UK, the US, Poland and Israel, and employs more than 28,000 people.
The company is holding out for releases of Black Panther II and Avatar II, which it hopes will be hugely successful, however the pace of small screen releases is continuing, with Disney planning to nose its live action release of Pinocchio directly onto its streaming service.
It doesn’t look like it’s going to be a happily ever after ending for Cineworld. And those of us not invested in the ailing cinema business can break out the popcorn and watch the show from the side-lines.
