Picture darkens at Cineworld as pandemic punctures film release schedules again

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Cineworld’s annual report for 2018 described that year as ‘transformative’ for the group, thanks to the £2.3 billion acquisition of US cinema owner and operator Regal Entertainment and it was absolutely spot on – but unfortunately not in the way that was intended, not least because the purchase price came with an extra £1.6 billion in inherited liabilities which are now crushing the group. While no-one could have foreseen a pandemic, its duration or its impact upon major leisure groups, Cineworld was already facing the threat of streamed content from Netflix, Amazon and others. As a result of the Regal deal it doubled-down and increased its exposure to unpredictable film release schedules that had themselves become increasingly reliant upon a few smash-hit franchises, such as Marvel’s super-hero series and Star Wars.

Cineworld left itself more exposed to any unexpected downturn in trading than would have otherwise been the case. The results for the first-half of 2020 show cash balances of $285 million, set against borrowings of $4.2 billion and lease liabilities of a further $4.3 billion and in the first six months of the year lease payments of $166 million easily outstripped interest payments of $41 million.

Source: Company accounts. Numbers stated in sterling until 2018. Excludes lease liabilities.

There will doubtless be more than a few nervous commercial property landlords looking at Cineworld’s decision to mothball 763 cinemas in the UK and USA, in addition to 45,000 very concerned employees.

The news and resulting share price collapse will also be a hammer blow to the family of CEO Moshe Greidinger, as it owns a one-fifth stake in the business via Global City Theatres, a holding which was refinanced as recently as September.

The temporary closure of the cinemas may further cut costs and reduce cash burn but the company is still looking into ways of raising cash. The lower the price goes, the more shares it will need to issue, something which could serve to dilute the Greidinger family stake, so more borrowing and asset sales could also be under discussion, leaving management and shareholders with an unappealing range of options.

At least there are no major debt repayments due until 2023 and the bulk of Cineworld’s borrowing only matures in 2025 and 2026. That eases some of the pressure, although there will still be covenant tests due in December and June, and the first-half results statement shows these tests and their terms remain under discussion.

Source: Cineworld 2019 annual report and accounts

The best-case scenario is that the pandemic is reined in, studios release their films and customers are happy to return to cinemas, but Cineworld will still probably need to raise fresh cash to see it through, unless this happens much more quickly than MGM and the team behind the James Bond franchise currently expect.

Again, no-one could have predicted a pandemic and its impact. But Cineworld’s stretched balance sheet – which would have been saddled with even higher liabilities had the proposed purchase of Canada’s Cineplex gone through – left the company exposed to any unexpected shock.

It will therefore be interesting to see if boardrooms start to fight shy of so-called ‘transformative’ deals, at least if they are funded by borrowing, no matter how low interest rates are, given how the pandemic is bringing home the risks inherent in any acquisition.

As the American writer and behavioural finance expert Morgan Housel once noted:

‘The tail-end consequences of risk – like pandemics and depressions – are what makes the pages of the history books. They’re all that matter. They’re all you should focus on.’

These articles are for information purposes only and are not a personal recommendation or advice.


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Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.