Cineworld Group PLC (LSE:CINE)’s entire value could be wiped out after the cinema chain was on the wrong side of a legal ruling over a cancelled Canadian deal.
It could be seen as particularly cruel timing for the Anglo-US group as it comes alongside new government Covid restrictions that threaten to destroy hopes that big Christmas blockbusters such as Spider-Man: No Way Home would fill out cinemas around the world.
The owner of the Cineworld chain in the UK and Regal in the US was ordered by a judge in Ontario’s top court to pay a £725mln bill for damages to Toronto-based Cineplex (TSX:CGX).
Over a third of the company’s value was wiped out in morning trading on Wednesday, with the shares now down 90% since highs in 2019.
Cineworld was taken to court after pulling out of a deal to buy its Canadian rival when the pandemic took hold in early 2020.
After failing with a counter-suit argument that Cineplex had breached a number of covenants, the London-listed group said it will appeal the decision.
It was not only investors that baulked at the ruling with analysts also shocked.
Coming three months after Cineworld agreed to pay US$214mln to disgruntled Regal shareholders who moaned that the £2.7bn acquisition of the US chain in 2018 wasn’t done at a fair price, the C$1.2bn of damages is “clearly material in the context of Cineworld's available resources”, said Peel Hunt analyst Douglas Jack.
AJ Bell's Russ Mould added that the ruling “threatens to put significant financial pressure on the business if its appeal is unsuccessful”.
Going further, Berenberg analyst Owen Shirley said it had “the scope to wipe out all the remaining equity in the business”.
Analysts noted that the company was the victim of its hunger for growth in 2018 and 2019, despite having a large pile of debt.
The Cineplex deal “was a bold move, and many people suggested its eyes were bigger than its belly" said Mould.