Noah Zivitz

Managing Editor, BNN Bloomberg

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An analyst who covers Cineplex Inc. cut his price target on the stock Thursday as doubt grows about Cineworld Plc's ability to cover the fallout from a legal fight over the two theatre operators' failed tie-up.

Maher Yaghi from Scotiabank reduced his target on Cineplex shares to $14.75 from $16.00 after he eliminated all value stemming from that litigation on the heels of an update from Cineworld on its cash crunch.

In that update, Cineworld warned that recent traffic levels at its theatres haven't lived up to its expectations. It blamed a limited slate of films, and said it's "taking proactive steps to ensure it has the balance sheet strength and flexibility to adapt to market conditions."

Cineworld, like other movie theatre operators, was battered by the pandemic, which also upended its plan to buy Cineplex. That deal, which would have seen Cineplex sold for $34 per share, was announced on Dec. 16, 2019 — just a few months before COVID-19 brought the economy to a standstill.

The takeover agreement ultimately broke down, leading to a court fight, which resulted in $1.24 billion in damages being awarded to Cineplex by the Ontario Superior Court of Justice last December. The dispute continues, however, and will be heard by the Ontario Court of Appeals in October.

As Cineworld attempts to manage its strained balance sheet, it said it's assessing a variety of strategic options to bolster liquidity and "potentially restructure its balance sheet through a comprehensive deleveraging transaction."

As of the end of 2021, Cineworld said it was carrying US$4.8 billion in net debt, excluding lease liabilities.

"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," Yaghi stated in his report to clients.

For its part, Cineplex has struck an optimistic tone about how the process will play out, including by announcing last week that it lined up Moelis & Company as a financial advisor on how to “maximize and monetize” the value of the legal judgment.

“We feel very strongly, and so do our supporters, about our position and where things are going to go,” Cineplex president and chief executive officer Ellis Jacob said about the legal proceedings in an Aug. 11 interview.

“We’ll just have to wait and see, and can’t judge where things are going to end up.”