The potential bankruptcy of world No.2 cinema operator Cineworld is shining a spotlight on the wider industry as it struggles to recover from the pandemic and compete with the growing popularity of streaming.
Debt-laden Cineworld, which owns the Regal chain in the United States and runs theatres in nine other countries, said last week a lack of blockbusters was keeping movie-goers away and impacting its cash flows. Last week, AMC Entertainment Holding Inc also flagged a tough third quarter due to a slim film slate. Its shares plunged 38% in early U.S. trading on Monday.
Cineworld shares, which hit a record low on Friday after the Wall Street Journal first reported its potential bankruptcy, were down 26% to 3 pence at 1340 GMT. That compares with a peak of more than 310 pence in 2017. Cineworld, which had $8.9 billion of net debt at the end of 2021 and had already said it was looking at ways to restructure its balance sheet, confirmed on Monday one option was a voluntary Chapter 11 bankruptcy filing in the United States.
“Cineworld would expect to maintain its operations in the ordinary course until and following any filing,” said the London-listed company, which operates more than 9,000 screens and employs around 28,000 people. While Cineworld’s specific issue is its debt pile, the broader change in how audiences want to watch movies is a trend unlikely to reverse or get any easier for cinema chains, Hargreaves Lansdown analyst Sophie Lund-Yates said.
“Cineworld’s challenges are a warning for the entire sector,” she said. A Chapter 11 filing can allow a company to stay in business and restructure its debt.
“But since the company owns so little in the way of tangible assets, much of its debt will be unrecoverable and its equity holders will be wiped out,” said Barry Norris, fund manager at Argonaut Capital. Cineworld, which declined to comment on the hedge fund’s remarks, said it was in talks with many of its major stakeholders, including lenders and legal and financial advisers, and reiterated any deleveraging transaction would lead to very significant dilution of existing equity interests.
Two years ago, it abandoned a plan to take over rival Cineplex and is in the midst of a legal dispute with the Canadian company, which has sought C$1.23 billion ($946 million) in damages for walking away from the deal. Over the years, Cineworld has expanded globally through acquisitions, including its $3.6 billion purchase of Regal Entertainment in 2017.
The company has payment obligations to disgruntled former Regal shareholders, further straining its finances. Excluding lease liabilities, Cineworld’s net debt was $4.84 billion at end-2021, and it had cash of $354 million.
Its third largest shareholder, Polaris Capital Management, had cut its stake to about 4.7% as of last Wednesday from a prior holding of 7.8%, a filing showed on Monday. Top shareholder Global City Holdings owns roughly 20% of Cineworld, according to Refinitiv data. Shares in Global City are held in trusts for the children of the company’s CEO Moshe Greidinger and his brother, deputy CEO Israel Greidinger.
($1 = 1.3006 Canadian dollars) ($1 = 0.8471 pounds)
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