The Cineworld (LSE: CINE) share price climbed 40% approaching midday on Monday, as talk of a takeover bid emerged, before dropping back. At the time of writing, Cineworld shares are up 20% on the day.
According to Sky News, Vue International is eyeing up a bid. The privately-owned cinema operator has, apparently, also lined up financial backers. The Sky report talks of funds managed by Barings and Farallon Capital Management.
In early January, Cineworld announced that it “has been in discussions with its key stakeholders to develop a proposed chapter 11 plan of reorganisation that seeks to maximise value for the benefit of moviegoers and all other stakeholders.”
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The update added that “the company will also run a marketing process in pursuit of a value-maximizing transaction for the group’s assets, focused on proposals for the group as a whole.“
At the time, rumours emerged that AMC Entertainment was interested in buying some of Cineworld’s cinema assets. But the company denied it. This appeared to have ruled out any piecemeal offloading.
In the light of that, the mooted takeover approach from Vue is presumably for the entire company. So what’s likely to happen? And are Cineworld shares a good speculative buy now?
Wipeout
As it stood, things looked dire for shareholders. The market cap had fallen to just £60m. And that’s with the balance sheet carrying $8.8bn net debt at 30 June 2022. Creditors get priority in any bankruptcy, with shareholders at the bottom of the pecking order. So any financial rescue deal would surely wipe out existing shareholders’ interests.
After January’s proposal to seek buyers for the company, I expect quite a few investors will have risked a bit of cash. They’d hope to make a short-term profit from any subsequent takeover. Now that an approach has emerged, does it make sense to buy?
On the downside, I fear there might be little profit to be made to offset the risk. Normally, a suitor needs to make a sufficiently attractive offer for shareholders and the board to approve. But these are far from normal circumstances.
Options
What options do Cineworld shareholders have right now? “No, you’ll to have to raise your offer if you want to take on its billions of debt“? That doesn’t sound like a strong negotiating position. Not when the alternative could be a forced asset sell-off that leaves them with nothing.
On the other hand, who else might be waiting to see the size of any Vue International offer? And who might try to beat it? I think a bidding war seems like the best possible outcome for shareholders right now.
Buying today would really just be a gamble. And that’s enough to keep me away. But I hope Cineworld shareholders are close to getting something out it. I’d feared they’d get nothing.
