Warner Bros took a bullish stance on Christmas last week. The movie studio announced that its new Wonder Woman 1984 superhero film, starring Gal Gadot, would be seen in cinemas in December. It also plans to release the film straight to streaming with HBO on the same day.
Cinema chains globally heaved a sigh of relief. Over the past few months, the release of one big blockbuster film after another has been delayed. For Cineworld, James Bond was the final straw: last month, it closed all its theatres in the UK and America, and has been racing to secure a rescue deal.
It has been a dramatic few months for Cineworld shares, which spiked more than 65% after news that both the Pfizer and Moderna vaccines had been 95% effective in trials. They closed on Friday at 46.09p, valuing the company at nearly £633m.
However, Cineworld’s problems stretch beyond the latest film releases. Even before the pandemic, the markets believed it was on shaky financial ground. The shares had fallen more than 30% between May and the end of December last year.
Many of the fears over Cineworld centre on its debt pile. Mooky and Israel Greidinger have built a global empire of 787 cinemas by gorging on cheap debt to fund acquisitions. At the last count, the company had debts of $8bn (£6bn). With revenues of $2.2bn and adjusted core earnings of $758.6m between January and June 2019, this debt level looked steep. With revenues of $712.4m and core earnings of $53m in January to June this year, it looks ludicrous. The Greidinger family trust, Global City Holdings, had to reduce its stake in Cineworld by a third this year in order to avoid a margin call on a loan.
When it released interim results in the summer, Cineworld warned that it would breach its covenants — but expected waivers to be obtained. It is now close to agreeing a rescue deal and is attempting to thrash out rent reductions with its landlords, which is likely to involve a controversial insolvency process known as a company voluntary arrangement (CVA). It could also lead to the permanent closure of some UK cinemas. Any deal is likely to give lenders security over the company’s assets.
Cineworld had an estimated $260m of liquidity at the end of August, and a cash burn rate of about $50m a month. Time is running out.
Potential financial saviours will want favourable returns to compensate them for their risk. What suits them is unlikely to suit existing shareholders. Despite the glimmers of positive news, it’s too early to call a recovery. Avoid.
