The collapse of Cineworld’s recommended takeover of Cineplex was greeted with a sigh of relief by the British company’s shareholders (Dominic Walsh writes). Strategically, buying Canada’s biggest cinema chain may have been an excellent deal, but loading an already stretched balance sheet with another couple of billion dollars of borrowings in the middle of a pandemic — and with zero revenues coming in — never looked like a great idea.
When Cineworld’s brief statement came out on Friday night, it felt like the words of a company that had been looking for a way out of the C$2.8 billion (£1.6 billion) transaction for weeks and finally had come up with an excuse.
Neither side is saying too much about the reasons: Cineworld blamed “a material adverse effect” and “certain breaches” relating to the deal, which the Canadian group strenuously rejected, claiming in turn that “outbreaks of illness or other acts of God” were explicitly excluded from the deal agreement. It argued that Cineworld was simply suffering a bout of “buyer’s remorse . . . in light of the Covid-19 pandemic”.
Because Cineworld had lined up the funding for the deal and both sets of shareholders had given it the green light, break fee arrangements have fallen away. Its withdrawal could still prove costly, though, because Cineplex is poised to start legal action, while Cineworld is threatening to respond in kind.
With concerns over its debt now parked, the focus of attention returns to the fundamentals of a business that, only last week, prompted Fitch, the rating agency, to issue a note headlined: “Will Cineworld run out money?” One of Fitch’s concerns is that the lockdown not only has damaged the company’s finances but also, more seriously, may have accelerated changes in consumer viewing habits as people increasingly turn to video-on-demand providers such as Netflix and Amazon Prime.
The last time I tackled Mooky Greidinger, 67, chief executive, on this issue, he was adamant that Netflix was not a threat. “People will not stay at home seven days a week,” he said, “and if you go to Netflix, typically anyone you ask will tell you they’re on it for the TV series. I don’t think you’ll find anyone who’ll tell you they’re on Netflix because of the great movies. Netflix is not an enemy and it’s not a threat.”
Assuming that he’s right and that the company meets its target of opening all 787 of its cinemas by the end of July, it will have a big advantage over other varieties of out-of-home leisure operators: social distancing will be less of a problem as Cineworld can simply keep showing the film to meet demand. So, for example, instead of showing a film three times a day to, say, a hundred people per viewing, it can show it ten times to thirty people. So the key issue when its venues reopen will be consumer demand rather than reduced capacity, putting the focus back on the quality of the film slate.
The company, which started life in 1995, operates under the Cineworld and Picturehouse brands. Having listed on the stock market in 2007, it completed a transformative deal in early 2018 to buy Regal, the second largest cinema chain in the United States, for $5.8 billion. Cineworld is now the world’s second largest operator behind AMC, the Odeon owner.
The proposed takeover of the Toronto-listed Cineplex would have fitted snugly alongside Regal to create North America’s No 1 chain. It may yet, according to Ivor Jones, an analyst at Peel Hunt, who clearly believes in happy endings. “Once tempers have cooled, we believe Cineworld and Cineplex are likely to find a way to merge,” he said.
ADVICE Avoid
WHY The shares, up 3 per cent, or 2¼p, at almoast 79p, are down 70 per cent over the past year, but tough times persist
The Scottish Investment Trust
The Scottish Investment Trust began to shore up its defenses before Britain went into lockdown (Greig Cameron writes).
Alasdair McKinnon, 44, in-house manager of the trust since 2015, was due to take a trip to Japan in February, so took a keen interest in the emergence of a virus causing misery in China. He was puzzled by why the wide reporting of the outbreak and its international spread had relatively little impact on markets initially — and, as a contrarian investor, he said: “We always look for situations where the consensus view looks wrong and were puzzled by this degree of complacency. We reasoned that it was possible that other countries would be forced to enact the type of lockdown measures being seen in China.”
Some re-shaping of the portfolio took place in February, with exposure to banks, retail and energy all scaled back. Additions were made in areas such as goldmining, tobacco, healthcare and utilities.
The Edinburgh-based trust’s results for the six months to April 30, published yesterday, showed a total return of -4.4 per cent. While the Scottish doesn’t have a formal benchmark, the MSCI All-Country World Index was -5.3 per cent over the same period.
James Will, 65, chairman, reaffirmed its commitment to providing dividend increases and pointed to a track record of that spanning more than three decades. For the 12 months to October this year, the trust is planning three quarterly dividends of 5.7p each, with the final quarterly dividend set to be higher than that. It paid 22.8p for the 12 months of 2019.
Mr McKinnon has concerns around how the Covid-19 pandemic plays out, but he also sees opportunities and added: “Governments now seem determined to create growth and, we suspect, will show increasingly greater tolerance for inflation. This would be a favourable backdrop for a contrarian investor.”
The trust entered 2020 with its shares at more than 830p before they went as low as 557p in mid-March. They were changing hands for 724½p today, up 14½p, or 2 per cent, so there is still room for recovery there.
ADVICE Hold
WHY The expectation of a rising dividend is attractive
