This summer, fighter pilot Pete (Maverick) Mitchell thwarted a rogue nation’s nuclear ambitions, won a heroine’s heart and rescued theatre chains by bringing audiences back to the movies.
Top Gun: Maverick’s blockbuster success – worldwide ticket sales are through US$1.3-billion – helped boost attendance at North American multiplexes to 75 per cent of pre-COVID-19 levels. With a solid pipeline of new releases coming this fall and next year, executives and analysts were optimistic on the prospects for Cineplex Inc., the dominant domestic chain, and U.S. rivals AMC Entertainment Holdings Inc. and Cinemark Holdings Inc. when the companies recently reported financial results.
Yet one cinema operator seems immune to Tom Cruise’s charms.
U.K.-based Cineworld Group PLC is pleading poverty at a time when most chains are celebrating the return of movie magic. In a statement last week, the owner of more than 9,000 screens said recent admission levels have been “below expectations” owing to a limited slate of films. Cineworld said a financial restructuring may be required.
On Monday, the company detailed its plans, saying in a statement: “The strategic options through which Cineworld may achieve its restructuring objectives include a possible voluntary Chapter 11 filing in the United States.”
Why is Cineworld taking a pessimistic view when most chains are forecasting a Hollywood ending to the financial woes that came with the pandemic? The company is setting the stage for a showdown with lenders and jilted takeover target Cineplex.
Cineworld chief executive Mooky Greidinger built the world’s second largest cinema operator through a series of debt-financed takeovers, including a US$3.6-billion acquisition of U.S. rival Regal Entertainment in 2017. The company’s most recent financial statements show it owes lenders more than US$5-billion.
On top of its debt, an Ontario court ordered Cineworld to pay $1.24-billion to Cineplex last December for breaching its $2.18-billion agreement in 2019 to acquire the Canadian company. Cineworld subsequently appealed the decision.
In the past, Mr. Greidinger played hardball with rivals over industry issues such as film distribution rights. He now seems intent to use the pandemic’s impact to rework loans and, potentially, the terms of the Ontario court settlement.
Cineworld will win concessions, according to analysts. Prior to the U.K. chain’s recent announcements, analyst Maher Yaghi at Bank of Nova Scotia valued the court decision at $124-million (10 per cent of the actual award) when he calculated a target price for Cineplex’s cineplee. In a report last Friday, he cut that estimate to zero.
“While it is hard to predict what form the balance sheet restructuring will take and potential impact on a settlement with Cineplex, we feel it is prudent at this time to remove any remaining value that we had in our target price coming from Cineworld,” said Mr. Yaghi.
Other Bay Street analysts also say they’ll only count the cash from the court decision when it arrives in Cineplex’s account. However, investors clearly ascribed some value to the settlement, as Cineplex’s stock price is down by 14 per cent since the U.K. company revealed restructuring plans.
Cineplex plans to fight for what the courts said it is due. Earlier this year, the company hired experts in restructurings – boutique investment bank Moelis & Co. and law firm Goodmans LLP – to extract as much value from the legal settlement as possible. On Monday, the Canadian company declined to comment on Cineworld.
At Cineworld, the stage is now set for a restructuring with dogfights to rival the last few minutes of the Top Gun sequel. Mr. Greidinger is fighting for his family’s fortune. Cineworld’s CEO and his family are the single largest shareholders in the chain, with a 20-per-cent stake. In its statement last week, Cineworld said: “Any deleveraging transaction will likely result in very significant dilution of existing equity interests in Cineworld.” In June, another U.K. chain, Vue International Bidco PLC, emerged from a recapitalization that saw creditors end up with 100 per cent of the company’s equity.
The crowds turning out to see Maverick and his fellow fighter pilots strut their stuff show that movies in theatres still draw audiences, and there’s a profitable postpandemic future for chains. At Cineworld, the question is who will be at the controls when that Hollywood ending plays out.
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