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Cineworld refinancing seems inevitable but is is time to die for cinemas?

Analysts say an emergency fundraising is likely to be necessary and it could be highly dilutive rights issue

Cineworld Group PLC -

A refinancing seems inevitable at Cineworld Group PLC (LON:CINE) as the cinema chain suffers from the delays to major film releases, but its workers are not likely to be rescued. 

Cineworld confirmed on Monday that it was “temporarily suspending” its cinemas on both sides of the Atlantic, 127 cinemas under the Cineword and Picturehouse chains in the UK and 536 Regal movie theatres in the US.

With rivals Odeon also revealing that many of its 120 UK cinemas will be closing their doors during the week from next week and another, Vue, saying it was looking at its options, the whole industry model is being questioned as the impact of the pandemic brings makes the title of the postponed James Bond film seem darkly appropriate.

“It confirms what we already know: cinemas can’t exist without compelling content,” said Harry Barnick, leisure sector analyst at Third Bridge.

The delay to the latest in the 007 series, A Time to Die, might seem the straw that broke the camel’s back after several other delays in recent weeks, analysts say the board’s ambitious strategy in recent years is partly to blame. 

Cineworld was “bloated” with debt even before the pandemic struck, with borrowings of US$4.2bn and lease liabilities of US$4.3bn, thanks mainly to two large leveraged acquisitions in recent years.

This debt pile versus a market cap of around half a billion at the close on Friday means Cineworld is a difficult position to refinance if it does not have customers coming through the doors, says Neil Wilson at Markets.com.

As a result of the 2018 acquisition of Regal Entertainment in the US, paid for with the help of a £1.7bn rights issue, the FTSE 250 company “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”, says Russ Mould as AJ Bell.

“Cineworld left itself more exposed to any unexpected downturn in trading than would have otherwise been the case.”

While not many investors would expect a cinema group to have been prepared for a pandemic, and the consequent impact upon the leisure sector, Cineworld was already facing the threat of streamed content from Netflix, Amazon and others. 

Once the cinemas are mothballed this week and staff are unceremoniously ushered out of the emergency exit, the company, which cash balances of US$285mln at the half-year stage, is expected to burn through around US$200mln of cash in the second half of 2020, according to forecasts from analyst Ivor Jones at Peel Hunt. 

It would churn a further US$250m if the cinemas remain hibernated for the first half of 2021. 

Jones is optimistic: “If this can be provided through debt facilities then we believe there is clear equity upside from here."

In the scenario where things get back to normal by next spring, possibly with the help of a vaccine, there will be a backlog of major films to exhibit and pent-up demand from audiences to satisfy, he says.

However, if Cineworld raises all its required cash via an equity issue, the Peel Hunt analyst said it would imply roughly a 1-for-2 issue and considerable potential dilution, and some very unsatisfied shareholders.

Wilson, who is less optimistic, sees a refinancing by some sort of rights issue as all-but inevitable. 

“However, I fear there have been permanent behavioural shifts in consumers that will mean the market is forever smaller. It is hard to gauge right now what permanent damage is done to cinemas, but the closure of Cineworld, however temporary, is a plain indicator that it could be significant and lasting. 

“The advance of over-the-top streaming services, especially Netflix with its vast Hollywood budgets and ability to make feature films, has been a critical blow to the industry and Covid has vastly compounded the problem by keeping viewers away. In its interim results last month, the company warned that a worsening of the pandemic could leave it unable to survive; today’s announcement confirms that it is on the brink.”

Cineworld’s news has a number of broader implications for the sector, says Barnick, suggesting that it could lead to further cancellations and in turn and affect competitors large and small, with other scheduled release more likely to be delayed or move directly to online streaming on demand.

“Whilst national chains like Cineworld have suffered due to the pandemic, smaller independent chains have felt the downturn just as harshly. It appears Cineworld intends to re-open sites in the new year, but can smaller operators afford another six months of closures and does this spell the end of the independent cinema sector in the UK.”

The Chancellor of the Exchequer’s new jobs support scheme, which will subsidise wages of part-time workers, will provide no lifeline for the 5,500 Cineworld UK employees who will lose their jobs this week.

And there are likely to be many others across the leisure industry who, deemed ‘unviable’ by the government, are facing a bleak run up to Christmas.

Quick facts: Cineworld Group PLC

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Price: 64.8776 GBX

Market Cap: £888.88 m

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