UK-based movie theatre giant Cineworld Group PLC is pulling out of its $2.2-billion deal to acquire Toronto-based Cineplex Inc.
Cineplex announced on Friday that it had received notice about the termination of the transaction, and acknowledged that the deal “will not proceed.” The company said it will now pursue legal action, seeking damages for what it characterized as a breach of contractual obligations by Cineworld.
Cineplex said it plans to hold Cineworld “responsible for its breaches and failure to complete the Transaction at $34.00 per common share,” which was the original price of the deal announced in December.
In a statement on Friday, Cineworld acknowledged that the Canadian company had faced “a material adverse effect” to its business, and said the termination was due to “certain breaches” of the agreement by Cineplex. According to Cineplex, Cineworld claimed those breaches included not operating its business “in the ordinary course.” Cineplex pointed out in its statement that the deal provided exceptions for “outbreaks of illness or other acts of God.” The COVID-19 pandemic has forced movie theatres around the world to shut their doors. Cineplex accused Cineworld of using the pandemic as a cover for “buyer’s remorse” and to “avoid its obligations” under the deal.
In turn, Cineplex accused Cineworld in its statement of breaching its obligations by not using “its reasonable best efforts to obtain approval under the Investment Canada Act as soon as reasonably practicable”. According to Cineplex, such an effort would have ensured the deal closed “months ago.” Cineworld denied that claim in its statement, and said it “will vigorously defend” itself against such allegations. The company added in its statement that it “has also reserved its right to seek damages from Cineplex” for breaches.
The deal was first announced in December and was initially expected to close in the first half of this year. Cineworld offered $34 per share for Toronto-based Cineplex, a 39-per-cent premium compared to the average share price in the 30 days leading up to Dec. 13 – the last trading day before the deal was announced.
Since then, the shock of the global pandemic has hit both companies hard, and pushed down share prices for movie theatre companies in general.
Cineplex’s stock has fallen almost 60 per cent since the beginning of the year, closing at $13.82 on Friday – less than half of Cineworld’s agreed purchase price. Cineworld’s stock has fallen 65 per cent since the beginning of the year.
Cineplex is Canada’s largest movie theatre chain, with 1,687 screens in 164 theatres across the country. UK-based Cineworld became the world’s second-largest theatre chain in 2018, after it acquired Knoxville, Tenn.-based Regal Entertainment Group in a US$3.6-billion deal. The Cineplex deal would have made Cineworld the largest chain in North America with nearly 8,900 screens, though AMC remained the world’s largest movie theatre company. Cineworld had planned to take on US$2.3-billion in loans to finance the deal.
“Scale matters in this business,” Cineworld CEO Mooky Greidinger said at the time.
There had been speculation within the investment community for months that the deal was on shaky ground, even before the pandemic's calamitous effect on the movie theatre industry. This is the largest deal to fall apart in Canada citing COVID-19 as a material adverse effect.
With a report from Jeff Jones and a file from Canadian Press
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