- Expansion plans prove group's undoing
- Debt and legal claims cast doubt on its survival
- Shareholders at the back of the queue
Having collapsed 58% to 4p on Friday, shares in troubled entertainment group Cineworld (CINE) drifted lower again at the start of the week after the company confirmed investor concerns it could file for bankruptcy.
In a response to media speculation, the firm said as part of its restructuring it was considering ‘a possible voluntary Chapter 11 filing in the United States and associated ancillary proceedings in other jurisdictions as part of an orderly implementation process’.
EPIC AMBITION
In a stunning victory for short sellers, who account for 7.5% of the outstanding equity capital according to the shorttracker.co.uk website, shares of the cinema group have lost 99.5% of their value from the heady days of summer 2017 when they topped 700p.
Cineworld’s troubles began way back in November 2017 when it offered to buy Regal Entertainment, the second-largest US cinema chain.
The deal to create the world’s number two movie chain with 9,500 theatres across 10 countries was financed with $4 billion of debt and $2.3 billion of fresh equity.
Chief executive Mooky Greidinger claimed at the time Regal was ‘a great business’ which provided Cineworld with ‘the optimal platform on which we can continue our growth strategy’.
Investors seemed much less sure and marked the shares down sharply on the prospect of the company’s gearing jumping from one times EBITDA (earnings before interest, taxes, depreciation and amortization) to four times.
After a deeply discounted and highly dilutive rights issue at the start of 2018 to fund the Regal deal, Cineworld shares stabilised over the next 18 months as management found more cost synergies than originally planned, although concerns over its high debt level remained.
END CREDITS
At the end of 2019 Greidinger surprised investors with a bid to buy Canada’s Cineplex for C$2.8 billion (£1.6 billion), a 42% premium to the firm’s market value at the time.
The straw which broke the camel’s back wasn’t the premium, however, but the offer to buy Cineplex using even more debt.
Although the deal was scrapped six months later due to the arrival of Covid, Cineworld shares had already fallen by two thirds and never looked like recovering.
To add insult to injury, in December 2021 a Canadian court awarded Cineplex C$1.24 billion in damages for Cineworld’s breach of contract.
With its mountain of debt and legal liabilities, and a dearth of big film releases scheduled for the rest of this year to generate ticket sales, it may be that the only way Cineworld’s creditors stand a chance of getting any money back is to push the firm into administration and let the accountants take charge.
Unfortunately, shareholders are at the very bottom of the pile in these instances, behind the banks, bond holders and trade creditors.
