Towards the end of last year, it looked as if the Cineworld (LSE: CINE) share price was on the road to recovery. Cinemagoers were returning, a slate of high-profile films was planned, and the company had reported a substantial increase in sales as economies reopened.
Then the enterprise was hit by a knockout blow.
Cineworld share price knockout
At the beginning of December, the Ontario Superior Court of Justice ruled in favour of the Cineplex chain of cinemas in its legal battle with Cineworld. The two parties had been fighting the terms of a merger agreement, which they had signed before the pandemic. In June, it fell apart when Cineworld realised it could no longer make the transaction work.
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The court awarded Cineplex damages of C$1.2bn for lost synergies to Cineplex and C$5.5m for lost transaction costs. In total, the award amounts to a sum of £700m. Cineworld is appealing that judgement, and it could be some time before we know the final figure.
However, it is clear that this is a threat to the company’s existence.
With a market capitalisation of just £510m, the corporation cannot afford £700m in costs. It also has over £3.5bn of other debts.
According to the company’s financial statements for the period ending June 30 2021, total shareholder equity, or total assets minus total liabilities, was -£375m at the end of the period. This excludes any obligations related to the court judgement.
Including the potential cost, the corporation’s net worth could sit somewhere in the region of -£1.1bn.
Challenges ahead
I should note that these are only rough figures. As the company is appealing the settlement, it may not have to pay out to Cineplex. What’s more, the balance sheet figures exclude the second half of 2021. By all accounts, this was a busy period for the organisation, suggesting the state of its balance sheet may have improved.
Nevertheless, I think these rough numbers make it clear that the company is in a difficult position. As such, I think the stock could drop further in 2022. If it continues to lose money, or if the appeal goes against it, the stock could drop to 5p or even below this level.
In the worst-case scenario, the Cineworld share price could drop to zero. I think this is unlikely because management owns a significant stake in the enterprise, and those owners are likely to pull all the levers at their disposal to raise money. Still, it is something I will be keeping in mind.
So overall, despite the company’s improving training outlook, I am worried about the state of its balance sheet. With this being the case, I am not going to buy Cineworld for my portfolio any time soon. I think there are plenty of other stocks in the market that have more potential over the next few months and years.
