Trust a theatre owner to deliver a dramatic ending.
Cineplex Inc. chief executive Ellis Jacob gave his shareholders a thrill with a $2.2-billion takeover bid from British-based rival Cineworld Group PLC that still leaves open the delicious possibility of a bidding war for Canada’s dominant movie chain. The deal is pitched at a 42-per-cent premium to the recent price of Cineplex shares, and contains what investment bankers call a “go shop” provision, which allows Cineplex to spend the next seven weeks trying to find a richer offer.
At a time when private equity funds are awash in capital they need to invest, Cineplex seems an ideal target. The company generates significant amounts of cash, which could service debt from a leveraged buyout. During Mr. Jacob’s 16 years at the helm, Cineplex launched a number of businesses, including a digital media network, an e-sports platform and family entertainment centres, that a patient private equity owner could build over time.
Why would Cineworld sign off on a “go shop” agreement and risk losing this prize?
Spoiler alert: There’s no better bid coming. The British buyer knows that rivals have already taken a look and conceded that Cineworld is the logical buyer, with the greatest ability to pay.
In a quiet but thorough sale process, similar to the one that played out back in 2012 when Cineplex chairman Ian Greenberg sold his Astral Media to BCE for $3.4-billion, Cineplex’s executive team held talks with several potential bidders in recent months, according to financial and legal sources who asked for confidentiality because they are not permitted to speak publicly for the company.
One alternative offer came from another British-based movie chain, Vue International, which is backed by Canadian pension fund managers OMERS and the Alberta Investment Management Co. Vue, with 229 cinemas, wanted to merge with a slightly smaller partner, as Cineplex runs 165 movie theatres.
Cineworld is in another league, with 786 theatres in 10 countries. Chief executive Mooky Greidinger, whose family controls 28 per cent of the company, has expanded is through a series of acquisitions and said in a call on Monday: “Scale matters in this business.”
Vue and other potential buyers decided to quit the field as the price soared. Cineworld is willing to pay a multiple of 10.3 times Cineplex’s forecast 2020 earnings before interest, taxes, depreciation and amortization (EBITDA) to win the company, well above the nine times EBITDA that Mr. Greidinger paid last year to acquire U.S. chain Regal Cinemas, according to a report on Monday from analyst Aravinda Galappatthige at Canaccord Genuity. Mr. Galappatthige said: “We believe it would be challenging for a non-cinema player to make a competitive bid.”
That doesn’t mean Mr. Jacob, 65, is directing his last deal at Cineplex. To pay down debt accumulated in recent acquisitions, Cineworld is expected to sell off a number of businesses if it successfully acquires the Canadian company. Candidates include the digital-media division, which deploys those screens you see in Tim Hortons outlets and other locations.
Cineplex’s e-sports platform is also likely to be on the auction block. In November, Mr. Jacob said Cineplex is looking for a strategic partner for the business. Cineworld could also decide to cash in on Cineplex’s chain of entertainment centres, which carry the Rec Room, Playdium and Topgolf banners, and arcade-game manufacturer Player One Amusement Group.
Cineplex was open to an offer from Cineworld after its share price declined sharply over the past two years, in part reflecting a view that audiences are permanently moving from the local multiplex to streaming. The potential new boss played down the risk of losing customers to Netflix. In a call Monday, Mr. Greidinger said: “People will never stay seven days at home. We are competing for their free time outside of the house.”
If he’s right, then when the curtain goes down on Cineplex as a public company, the domestic investor audience should feel a sense of loss. This is the second large player to drop out of the Toronto Stock Exchange this year, as Hasbro Inc. announced plans to buy Entertainment One Ltd. for about US$4-billion in August. The Canadian market benchmark will be increasingly dominated by a handful of companies in financial services, telecom and resources.