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Despite Cineworld’s U.S. Bankruptcy, Cineplex’s Business Is In Better Shape Than Investors Think

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Cineplex’s Q2 2022 report delivered its first profitable quarter in more than two years. While a judgement payment by Cineworld would be nice, it’s not necessary for Cineplex stock to move higher in the future

Cineplex Responds To Cineworld’s Bankruptcy

Earlier this week, Cineplex (TSE:CGX), Canada’s largest operator of movie theatres, officially responded to Cineworld Group plc’s Chapter 11 bankruptcy filing in the U.S. At stake for Cineplex and its shareholders is a CAD$1.24 billion court-awarded judgement for damages caused by a breach of contract.

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The CAD$1.24-billion award made by the Ontario Superior Court of Justice on Dec. 14, 2021, awarded the sum after UK-based Cineworld walked away from its December 2019 arrangement agreement to purchase Cineplex for CAD$2.8 billion, a 42% premium to its share price at the time.

On June 12, 2020, Cineworld notified Cineplex that it terminated the arrangement due to Cineplex breaching its covenants for the arrangement. Cineplex sued Cineworld for the aforementioned breach of contract. After a three-month trial, the court ruled in Cineplex’s favour. The amount of the judgement was based on the synergies Cineplex would have gained by merging with Cineworld.

Since Cineworld terminated its agreement, Cineplex has lost 38% of its value. It is now trading at 75% below Cineworld’s $34 per share offer to buy the Canadian movie chain.

While Cineplex is concerned about its ability to recover any or all of the CAD$1.24 billion judgement against Cineworld, it’s confident in the future of its business.

Confident In Recovering

“Cineplex remains confident in the recovery of its businesses, its strong capital management and liquidity, and its efforts to manage financial uncertainties as it has done during previous economic downturns,” Cineplex’s Sept. 7 press release stated.

“While Cineplex anticipated low business volumes in August and September due to pandemic related production delays, August has performed stronger than initially expected and the Company remains optimistic about consumer demand and content supply in the fourth quarter of 2022 and in 2023.

On Sep. 9, Cineplex reported August box office results of CAD$36.1 million, 64% of the August 2019 box office. In July, its box office was CAD$65.6 million, 85% of August 2019’s box office.

Cineplex’s box office has been busy in September. On Sept. 3, which was National Cinema Day, more than 500,000 guests took in a movie at one of its 170 theatres across Canada. The turnout was the company’s best day in 2022 and the third busiest in the past five years.

The company reported vastly improved Q2 2022 results in mid-August with a 10-fold increase in theatre attendance, a 439% increase in revenues to CAD$350 million, and a net income of CAD$1.3 million, Cineplex’s first profit since the pandemic began.

“Cineplex delivered its strongest quarter in over two years, thanks to a great film slate and record-breaking results from across our diversified businesses,” said Ellis Jacob, President & CEO, Cineplex.

However, analysts aren’t nearly as confident.

In August, Scotiabank analyst Maher Yaghi cut his target price on Cineplex stock by CAD$1.25 to CAD$14.75, suggesting that virtually no value would be gained from Cineworld in the future.

“‘While it is hard to predict what form the balance sheet restructuring will take and potential impact on a settlement with Cineplex, we feel it is prudent at this time to remove any remaining value that we had in our target price coming from Cineworld,’ Yaghi stated in his report to clients,” Bloomberg reported on Aug. 18.

For its part, Cineplex has hired Moelis & Company to “maximize and monetize” its CAD$1.24 billion judgement.

Based on 63.3 million shares outstanding, even if it only could get 25 cents on the dollar, that would be worth CAD$4.90 a share in cash to the company’s balance sheet.

Article by Will Ashworth, Fintel