FTSE 250 leisure group Cineworld (CINE) has proposed to pay $23 per share for Regal Entertainment, the second largest cinema chain in the US.
It says such a deal, estimated to be worth $3.6bn, would be funded by debt and cash obtained through a rights issue.
The UK and Central European cinema chain has been quite vocal for some time about wanting to make a large acquisition.
Talking to Shares last week, chief financial officer Nisan Cohen said there were opportunities in Central Europe to buy a cinema chain without naming any targets.
He added that a deal in the UK wouldn’t be possible as the company already had such a strong position and couldn’t buy a rival due to competition issues.
‘Cineworld's present strategy is to evaluate all opportunities to complement its organic growth,’ said the company in a statement on 29 November.
‘In keeping with this approach, it has continued to monitor possible selective acquisitions that have the potential to enhance its existing operations, and which allow it to expand into new markets.
‘The potential acquisition of Regal would provide Cineworld with a highly attractive platform in the world's largest cinema market.’
Regal has 561 cinemas; 7,315 screens; and accounts for approximately 20% of all box office sales in the US. It operates in 43 US states plus some Pacific sites including Saipan and Guam.
Shares in Regal jumped to $19.63 on the potential merger news. Prior to the announcement its stock had been struggling, falling from $22 in April to a low of $13.98 in August, dragged down by a drop in summer attendance which hit earnings.
The company has itself recently been making acquisitions including 93 screens from Warren Theatres as part of a wider purchase of 134 screens and nine cinemas from various operators. In July it said four of these nine locations ranked among the top 200 grossing theatres in the US in 2016.
Cineworld’s last major acquisition was the £500m purchase of Cinema City International in 2014, providing it with a presence in seven countries across Central Europe and Israel.
It undertook a £110m rights issue and saw a complete change in the senior management team, bringing in people from Cinema City to run the enlarged business.
The rights issue was undertaken at 230p; anyone taking part in that financing would have been richly rewarded as the shares have since risen to 694.5p prior to the Regal announcement.
Today the shares fall 10% to 625p, perhaps in response to the company's plans to undertake a rights issue. Investors are clearly anticipating a large discount to the market price given the scale of the required fundraising.
