Key points:
- Cineworld confirms rumours that a reorganisation is necessary
- Any deleveraging will require significant dilution of equity
- Is there any value to CINE shares other than option value?
Cineworld (LON: CINE) shares are largely unchanged this morning as the company confirms the rumours of the weekend – there might well be a bankruptcy filing in the very near future. This is not exactly a surprise, indeed we reported that CINE shares appear to have no way out last week. Which is why, of course, Cineworld shares dropped 40% or so in one day last week – today's confirmation doesn't add a great deal to the information we already had.
The specific line in the announcement that matters to equity holders is this: “As previously announced, any deleveraging transaction would, however, result in very significant dilution of existing equity interests in Cineworld.” For there's really no other way out for Cineworld as a business other than a vast injection of capital. As the group is currently valued – the equity that is – at around the £60 million mark that simply will mean massive dilution.
It's possible, just about, to think that this rump valuation of the equity makes Cineworld an attractive buy but that's taking a very risky view of how any bankruptcy proceedings will work out. The difficulty is that the lower the CINE share price at this point the worse the outcome is likely to be for equity holders, not better.
Also Read: An Overview – Cineworld Shares And How To Buy
The base problem at Cineworld is a combination of vaulting ambition and the covid lockown. Just as the pandemic was coming into view Cineworld – already carrying significant debt – launched a bid for Cineplex in Canada. Given lockdowns, absolutely no cinema business for a year or more, this didn't work out well of course. The revenue simply wasn't there to cover the extant debt load, let alone the bid. A retreat was tried, but the courts aren't allowing it – so far at least – and there's the possibility that CINE will have to pay Cineplex $1 billion for reneging.
There are those who think it wasn't a good deal in the first place but circumstances confirmed that.
As lockdown ended it was possible to hope that something might change. It did, for AMC (NYSE: AMC) for it became a meme stock and that boosted the stock price and allowed issuance to rebuild the capital base. Cineworld didn't get that – and nor did it get the hoped for boom in business with the associated cashflow boost. It has been complaining that recent months simply haven't had the blockbusters which would have made a difference to its situation.
So, the net position is now that there's a towering pile of debt leaning on not enough equity capital to be supportable. Which means that there needs to be a reorganisation. Borrowing more won't work as firstly the interest rate would be v high on any more and secondly, it's the debt burden that is the problem. It's even possible to think that the assets as a whole aren't worth the current debt load.
So, more capital needs to come in. That might well be under the Chapter 11 umbrella and involve a significant debt for equity swap. Which would mean that the current creditors end up owning most to near all of the company. It's difficult to think that there's much equity value here – but the fact that the CINE share price isn't zero means some at least still think there's option value here – what will be the exact shape of the deal? That could well be the correct valuation too – option value.
