Down in penny stock territory, I’d thought Cineworld (LSE: CINE) shares were toast. The only way I saw out of the company’s financial mess was finalising bankruptcy, selling off cinema chain assets, and repaying debt… with probably nothing left for shareholders.
But it looks like I could be wrong, after the shares climbed on the hopes of a takeover.
We’re still looking at a price of only 4p, mind. And the company’s market cap is just a fraction short of £60m. But that 4p is more that twice Cineworld’s 52-week low of 1.8p. So maybe there really is hope.
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White knight
If the worst fears are realised, shareholders could lose the lot. But investors often buy in the hope of a white knight rescue, and sometimes it comes off.
Claims emerged mid-February that cinema rival Vue International has secured the financial backing it needs for a bid. According to Sky News, some of the funding is coming from Barings.
It follows on from the Cineworld board telling us it’s engaging in a marketing effort to try to sell the company as a going concern. At the time, any talk of asset stripping was dismissed as not being in the plan.
Up and down
When this news broke, the Cineworld share price quickly spiked up 40%. But since then, the shares have fallen back. Right now, the price is where it was before the bid rumour.
I think the reversal is very likely to be down to the complete absence of any confirmation or denial from Cineworld. In fact, the company has said nothing at all about any takeover. And neither has the alleged suitor.
Still, it does show the potential is there. There appears to be money ready to go into Cineworld shares should any further news be forthcoming. So, is it time to buy now? Should we “buy on the rumour, sell on the news,” as the old investing saying goes?
Investor aims
I’d say it depends on what an investor wants from it. I buy shares for the long term. And I’d only buy under two conditions, both based on billionaire investor Warren Buffett‘s advice.
If I wouldn’t want to own the whole company, then I wouldn’t consider buying a single share of it. And if I don’t want to buy and hold for 10 years, I shouldn’t buy for even 10 minutes.
Cineworld is a £60m company, with something like £7bn in net debt. I wouldn’t want to take that on and try to make a profit from it over 10 years. So I’m not buying.
Quick profit
But what about investors who want to buy now in the hope of a takeover bid making them a quick profit? I think there’s a reasonable chance they could be successful.
It would mean a fair bit of risk, and it’s really just a gamble. Finger in the air, I’d guess at a 50/50 chance between a profit or a wipeout. It’s not The Motley Fool way and it’s not for me. But I do hope it’s successful for anyone who tries.
