Cineplex units are down 8.9 per cent Monday following Onex's decision to sell a 13-million-unit holding in the theatre chain. The bought-deal financing saw Onex raise $185-million, with RBC Dominion Securities, Scotia Capital and National Bank Financial shouldering responsibility for selling the units to investors.
The sale of Onex's holding played out at $14.25 per unit, a 7.5 per cent discount to Cineplex's closing price on Friday. Cineplex units are changing hands midday Monday at $14.02 each, against a backdrop of weak equity markets. When the price of a stock or trust drops below the price of financing, that typically implies that the offering did not sell out.
The sharp drop in Cineplex units, strong performers in recent months, likely reflects supply and demand for this company. BMO Nesbitt Burns analyst Jeffrey Logsdon published a report Monday that noted the income trust typically trades just 220,000 units per day, so the bought deal represents 59 days of average demand for trust units.
"We would imagine that it will take some time for the market to absorb this level of units coming into the marketplace," said Mr. Logdson. "Once that occurs, we believe the stock will trade more in line with industry and company fundamentals."
BMO Nesbitt Burns, which did not take part in Monday's financing, has a $17 one-year target price on Cineplex units.
Ben Mogil, who covers the entertainment company for Thomas Weisel Partners, published a report on the chain Monday that has a $16 target price on Cineplex, and he said: "During one of the more tumultuous economic times in recent history, the first quarter of 2009 domestic box office was up approximately 11 per cent."
"What would make us more positive on the story is continued box office success in the second quarter of 2009," said Mr. Mogil.
While a move from $14 to $16 over 12 months represents a solid return, Cineplex no longer promises the 20-per-cent-plus annual performance that Onex targets. Recall that the company got into the movie business in part by purchasing theatres out of bankruptcy protection.
Harvesting winning investments and building a war chest that can be deployed in a downturn are standard practice at Onex, and Monday's sale should not be seen as a sign that the company lost faith in Cineplex, where Onex continues to hold a 2 per cent stake.