Cineworld’s uncertain reopening and its proposed takeover of Cineplex stand in the way of a necessary capital hike, buysiders and sources familiar with the situation said.
The UK-based cinema operator’s revenues have dried up due to COVID-19, with S&P on 30 April downgrading its debt rating to CCC+, as it estimated a monthly USD 50m cash burn even after cost cuts and about USD 200m of liquidity.
The firm said on 6 May it would suspend its dividend, but still faces “a short-term world of hurt”, one of the sources familiar said, and must raise capital to stay afloat. Banks are pitching to Cineworld on its liquidity options, a second source familiar said.
Not only does Cineworld need to raise about GBP 300m “straight away” to survive, the Cineplex deal compounds its woes by adding to it another troubled business while levering up, said one of the firm’s lenders and a buysider who in March exited his stake in the firm. The deal takes net debt/EBITDA above 5x, and whereas some peers have been more levered, such as AMC at 8x, no such case has ended well, the buysider noted.
Moreover, the deal dampens potential investors’ appetite to participate in a capital raise, the buysider said. Before raising equity, it must first nix the takeover, he and a third source familiar said.
Indeed, a group of Cineworld’s lenders have recognised the deal’s existential threat and mandated Houlihan Lokey and Arnold & Porter Kaye Scholer to explore the company’s options to walk away, as reported last month by this news service. They have not found a material adverse change (MAC) clause that would let Cineworld off, but Canadian regulators could yet block the deal given the increased risk of bankruptcy it would impose on the post-merger entity, and the potential job losses that would result, the lender said.
Cineworld could also walk away if Cineplex’s debt exceeds CAD 725m before 30 June, as reported. The buysider said this clause may be Cineworld’s best hope, given the CAD 599m in net debt the target reported at the close of FY19. Cineplex declined to comment, noting only that it has delayed filing its 1Q20 results to no later than 29 June.
Cineplex’s share price – below CAD 14 today (21 May) – suggests the market sees Cineworld exiting the CAD 34/share deal by at least one of these routes. But even then, Cineworld will only be able to raise capital if it makes clear when and how it will reopen, the third source familiar said. Its equity story depends on how comfortable its customers would feel sitting next to each other for hours at a time, as well as on the film slate ahead as the movie industry returns to form, he said.
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by Deane McRobie, Ryan Gould and Amy-Jo Crowley in London, and Reshmi Basu and Jonathan Guilford in New York