Cineplex – a Toronto theatre seen here in December, 2019 – stock sank as low as $8.84 in mid-March and closed on Friday at $13.82.Aaron Vincent Elkaim/The Canadian Press
The plot line of Cineworld Group Inc.’s planned takeover of Cineplex Inc. has been fraught with foreboding scenes since COVID-19 began to clear out movie theatres.
So it wasn’t a complete shock late on Friday, when British-based Cineworld pulled the plug on the $2.2-billion deal. It said Canada’s Cineplex breached conditions of the agreement, including failing to operate its business “in the ordinary course.”
This immediately becomes the country’s biggest test case for what is legitimate reason to tear up an agreement signed before measures to limit the novel coronavirus infection disrupted industries around the world.
For more than three months investors had wondered whether the transaction, announced late last year, would collapse as cinema revenues vanished and the stock prices skidded. They combed through the merger agreement to gauge the risk as lockdown orders spread.
The dispute is now a legal thriller about which material adverse effects – unforeseen factors so nasty that a deal no longer makes any sense – can force an annulment.
Details are still sparse, and neither company was willing to offer information beyond what each said in news releases. Cineworld accuses Cineplex of breaching terms of the arrangement and contends that a material adverse effect did in fact occur, but it did not spell out what it was. A pandemic is specifically excluded as such a condition in the agreement that the two sides signed, but there are stipulations that say Cineplex must keep debt under a prescribed ceiling.
For its part, Cineplex says this is all about Cineworld’s “buyer’s remorse.” It says it has lived up to its obligations under the agreement and Cineworld has no legal basis to pull the plug on the takeover. It also alleges Cineworld had gone into slow motion on efforts to seek Investment Canada approval, and that it could have wrapped up the transaction long ago. The Investment Canada review was to be completed on Monday after it was extended in early June.
Today, it looks like irreconcilable differences as neither side appears to have the appetite to put the deal back on track or even renegotiate it. The next stop is court, Cineplex says.
It was a different world in the movie business when the two agreed in December to combine to create one of the world’s largest theatre chains, with 11,200 screens. Cineworld offered $34 a share in cash, representing a 42-per-cent premium at the time.
Just a few months later, the superlatives were no longer a selling point as the extent of the virus’s impact on public gatherings became clear; there was no way to project when physical distancing rules would be lifted or even eased. In May, Cineplex postponed the release of its first-quarter results because of the financial uncertainty.
Cineplex stock sank as low as $8.84 in mid-March and closed on Friday at $13.82.
Two points in Cineworld’s argument – failure to operate the business normally and the introduction of a material adverse effect – are also at the heart of disputes about other deals that have collapsed during the pandemic era, said arbitrageur Julian Klymochko, chief executive of Accelerate Financial Technologies Inc.
“Those are two key aspects of merger agreements that will get sorted out in court in terms of setting a precedent,” he said.
In the United States, Forescout Technologies Inc. has sued private equity firm Advent International Corp. for backing out of a US$1.9-billion buyout and has asked a judge to force Advent to complete the deal. Advent has said Forescout failed to maintain operations and financial resources.
Simon Property Group, meanwhile, has terminated a US$3.6-billion offer to buy rival mall owner Taubman Centers. It claims the pandemic has hit Taubman disproportionately hard compared with the rest of the real estate industry because its indoor shopping centres cater largely to high-end consumers and tourists. Taubman is fighting the termination and says it may seek hefty financial damages.
In Canada, a smaller deal in which a buyer is claiming material adverse effects to cancel the agreement is before an Alberta judge. Toronto-based CanCap Group Inc., the parent of AutoCapital Canada Inc., seeks to scrap its $25.5-million bid for rival auto financing company Rifco Inc. amid a wave of defaults among borrower and business closings. Rifco wants the judge to order the deal to close.
There will likely be more such fights as the economic pain from the pandemic lingers.
Cineplex likely faces a short-term hit in the stock market this week with no high-priced bid to provide support to its shares. Its courtroom drama appears to be in for an extended run though as the legal system works out how to deal with massive health-related disruption and its impact on corporate deal-making.
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Jeffrey Jones