Cineworld (LSE: CINE) shareholders have had a painful week. On Wednesday, the cinema chain revealed it’s facing a survival crises. And the Cineworld share price plunged by a whopping 60% on the day.
The company spoke of a “gradual recovery of demand since re-opening in April 2021”. But it added that “recent admission levels have been below expectations”.
That’s down to a dearth of Hollywood blockbusters, the financial lifeblood of the cinema business. Cineworld reckons the lack of major releases is set to continue at least until November.
Emergency
But the big shocker came in what was to follow. The company spoke of “taking proactive steps to ensure it has the balance sheet strength and flexibility to adapt to market conditions”. That includes “financial initiatives to manage costs and enhance liquidity”.
Or, to put it in simpler terms, Cineworld needs some cash, probably pretty sharpish.
Even that might not be disastrous. No, what crushed the Cineworld share price is the drastic nature of the options the board is considering.
Deleveraging
It appears to be “evaluating various strategic options to both obtain additional liquidity and potentially restructure its balance sheet through a comprehensive deleveraging transaction”. The company added: “Any deleveraging transaction will likely result in very significant dilution of existing equity interests in Cineworld”.
So it’s an attempt to make big inroads into debt, rather than just shore up the books in the short term.
At the end of its last full year, Cineworld’s balance sheet was groaning under $4.8bn (£4bn) in net debt. That’s a company with a market-cap of only £280m before the share price crash. It’s worth only £133m now.
Survival
I think it’s likely that Cineworld’s business will survive. After all, there are some massive productive assets there in the shape of its cinemas. The big question hangs over who will own what, once the dust settles. Judging by the “very significant dilution” thing, existing shareholders might be left with very little of it.
We don’t yet know if that’s the way out the board will seek. But simply considering it as a real possibility, I’m surprised the Cineworld share price fell only as far as it did. It even bounced back a bit from Wednesday’s close.
Other problems
Even with a rescue deal, Cineworld’s woes won’t be over. The company’s legal battle with Cineplex is still to be resolved. As a result of previous litigation, Cineplex was awarded damages of more than C$1.2bn dollars. That’s about £1bn.
Cineworld is appealing that decision. If it fails to overturn it, or at least soften it, shareholders would suffer more pain.
My take?
My worst fears might not come to pass. Cineworld might choose a softer option to fund it through this shorter-term crisis. Or a rescue deal could end with less dilution than we might think. The mere fact that the share price has pulled back up a bit suggests some big shareholders see light at the end of the tunnel.
But from where I’m standing, Cineworld looks like it might be one of the most toxic stocks out there right now.
