Cineworld (CINE) shares slump over 31%: Can it recover from setbacks?

FTSE250 listed cinema chain operator Cineworld Group Plc (LON: CINE) stocks tumbled by over 31% after The Ontario Superior Court of Justice gave its judgement against the company in July 2020 litigation by Cineplex Inc.

The court has asked Cineworld to pay the damage of C$1.23 billion for lost synergies and C$5.5 million for loss due to transaction costs to Cineplex Inc. for termination and breaches of the acquisition agreement by the company.

The case dates back to July 2020, when Cineplex initiated a court proceeding against Cineworld after the company terminated its agreement relating to the proposed acquisition of Cineplex Inc. As a result, Cineplex Inc. claimed damages of up to C$2.18 billion. However, Cineworld defended the demand, saying that Cineplex breached multiple covenants of agreement and counterclaimed USD 54.8 million in damages and losses. But the court dismissed the company’s counterclaims and asked it to pay damages to Cineplex Inc. The company has decided to appeal the judgment and anticipate no damage payment till the new appeal is completed.

Cineplex Inc’s acquisition

The Toronto-based company operates over 165 theatres across Canada. It operates theatres under various brands like Cineplex Odeon, Galaxy Cinemas, etc. Cineworld has initially agreed to acquire Cineplex Inc. for C$ 34 per share in December 2019. However, soon after that Covid-19 pandemic happened, which severely impacted the entertainment industry.

In June 2020, Cineworld backed out of the acquisition deal, alleging that the company deferred account payable by at least 60 days and stopped paying landlords, movie studios after the start of the pandemic.

Cineworld Group’s business performance

Cineworld Group, in its business update for the four months to 31 October 2021, reported consistent improvement in revenue driven by the excellent lineup of movie releases after the lockdown. The overall box office revenue reached 90% compared to 2019, with the UK and Ireland region reporting 127% revenue growth compared to 2019.

The excellent revenue performance was mainly due to underlying high consumer demand and cost measure implemented by the company, resulting in positive cash flow in October 2021. The major blockbuster movies to be released in 2021 are expected to further benefit the company’s recovery.

Cineworld Group Plc’s Stock Performance

After the announcement of damage pay, the company’s stock price slumped by over 31%, making a new 52-week low of GBX 27.06 and turning the year-to-date return of negative 51.08% to its shareholders. The company’s current market cap stands at £623.07 million as of 15 December 2021.

(Image Source: Refinitiv)

Bottomline

The damage claim of C$1.23 billion threatens to put financial pressure on the company’s business which is already under stress due to the Covid-19 pandemic and fear of another lockdown due to the Omicron variant. Moreover, the current ruling comes just three months after the company paid USD 214 million to Regal shareholders who claimed the £2.7 billion acquisition of the Regal cinema chain was not made at a fair price. Though the company is going to appeal against the court’s verdict but considering its precarious financial condition; any adverse outcome would prove detrimental for the company.