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Apr 7, 2020

Cineplex deal under microscope as Cineworld halts dividends

Analysts split on greatest threat to Cineplex-Cineworld deal


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Cineworld Plc is suspending dividend payments as part of its cash-conservation strategy as COVID-19 batters the global cinema industry, and puts the London-based theatre operator's proposed takeover of Cineplex Inc. under the microscope.

In an update filed with the London Stock Exchange Tuesday, Cineworld said its board will review its dividends on an ongoing basis after implementing the halt, while saying its executive directors are deferring their salaries and bonuses.

The company also said it's curbing capital expenditures that are deemed unnecessary, and is in talks with landlords, film studios and suppliers to help mitigate the impact of closing its 787 cinemas.

"This is a painful but necessary process as before the onslaught of the COVID-19 virus, we were excited and confident about [our] future," the company said in a release.

As for the pending purchase of Toronto-based Cineplex, Cineworld had few words Tuesday, simply stating: "We continue to monitor progress of [our] proposed acquisition."

Cineplex agreed to be acquired by Cineworld in mid-December for $34 per share, and the arrangement was overwhelmingly approved by the Canadian theatre giant's shareholders in early February. Doubt about the deal's fate is evident in the market, however, with Cineplex's shares down 67.7 per cent year-to-date through the end of trading Monday as they closed at $10.92 apiece.

A representative for Cineplex declined to comment on Cineworld’s disclosure when contacted by BNN Bloomberg Tuesday morning.

Cineplex shuttered its entire network of theatres and entertainment facilities on March 16. At the time, and in its only formal update on the Cineworld deal since the pandemic began, Cineplex said the deal was still awaiting a green light under the Investment Canada Act, and warned that prolonged closures could hurt its ability to live up to the terms of debt conditions in the takeover agreement.

In a note distributed to clients Monday, National Bank Financial analyst Adam Shine said he doesn’t expect Cineplex’s debt to exceed $725 million, a threshold that would breach the agreement's debt terms, if its theatres remain closed throughout May.

He added the theatre chain may also be able to stay below that key level through June as long as it keeps a tight lid on spending “while also, importantly, getting reasonable rent relief.”

An analyst at JP Morgan, however, is less optimistic. In a note sent to clients last week, Alexander Mees said that if Cineplex’s cinemas remain closed until mid-May, it could exceed the agreed-upon debt ceiling.

“Cineplex had gross debt of $625 million at the end of December 2019,” he added in an email to BNN Bloomberg. “There is clearly a point at which the limit will be breached and Cineworld could walk away.”​

- with files from BNN Bloomberg's Noah Zivitz and Paige Ellis