Cineworld's possible bankruptcy puts cinema industry under the spotlight

With Cineworld, the world's no.2 cinema operator, staring at a possible bankruptcy as it struggles to cut debt and recover from the pandemic, the spotlight is on the challenges the industry faces as a whole to compete with the popularity of streaming movies at home.

The owner of Regal cinemas in the United States and operator of theatres in nine other countries, said last week a lack of blockbusters was keeping movie-goers away and impacting its cash flows. 

Having survived the pandemic, a near-term shortage of big-budget films and the popularity of online streaming are threatening Cineworld's recovery. AMC Entertainment Holding Inc  also flagged a tough third quarter due to a slim film slate.

Cineworld, which had $8.9 billion of net debt at the end of 2021 and had already said it was looking at ways to potentially restructure its balance sheet, said on Monday that one option was a voluntary Chapter 11 bankruptcy filing in the United States.

"Cineworld would expect to maintain its operations in the ordinary course until and following any filing," said the London-listed company, which operates more than 9,000 screens and employs around 28,000 people.

Its shares plunged to a record low on Friday after the Wall Street Journal first reported the potential move. 

The stock was down more than 18% on Monday to 3.3 pence by 1108 GMT. That compares with a peak of more than 310 pence in 2017. Shares in rival AMC dropped 30% in premarket trading.

"Cineworld's challenges are a warning for the entire sector," Hargreaves Lansdown analyst Sophie Lund-Yates said.

While Cineworld's specific issue is the amount of debt it has amassed, the broader change in how cinema audiences want to watch the latest hit is a trend unlikely to reverse or get any easier for cinema chains, Lund-Yates added.

A Chapter 11 filing allows a company to stay in business and restructure its debt.

"But since the company owns so little in the way of tangible assets, much of its debt will be unrecoverable and its equity holders will be wiped out," said Barry Norris, fund manager at Argonaut Capital.

Cineworld, which did not immediately respond to a request for comment on the hedge fund's remarks, said it was in talks with many of its major stakeholders, including lenders and legal and financial advisers, and reiterated any deleveraging transaction would lead to very significant dilution of existing equity interests.

Two years ago it abandoned a plan to take over rival Cineplex and is in the midst of a legal dispute with the Canadian company, which has sought C$1.23 billion ($946 million) in damages for walking away from the deal.

Over the years, Cineworld has expanded globally through acquisitions, including its $3.6 billion purchase of Regal Entertainment in 2017.

The company has payment obligations to disgruntled former shareholders of Regal, further straining its finances.

Excluding lease liabilities, Cineworld's net debt stood at $4.84 billion at December, and cash of $354 million.

($1 = 1.3006 Canadian dollars)

($1 = 0.8471 pounds)