The takeover of
Group by a much smaller European cinema chain is turning into a financial thriller. Working title: “The Big Long.”
An Israeli family, the Greidingers, have bet the farm on U.S. movie theatres at a time when others are worrying about the impact of Netflix. The script isn’t finished yet. If box office numbers recover convincingly in 2018, after the worst year for movie attendance in 25 years, Wall Street will make heroes of the plucky contrarians who came to America and dared dream big. Otherwise it could look more like a disaster movie.
Having run cinemas since the 1930s, the Greidingers expanded into Eastern Europe in the 1990s before negotiating a merger with U.K. operator Cineworld in 2014. The deal made them managers and anchor shareholders of Europe’s second-largest cinema chain, and also proved a hit with investors.
In November news broke that Cineworld was in talks to buy Regal, the second-largest U.S. chain, for $5.8 billion including debt. At the time, Cineworld’s market value including debt was roughly $2.8 billion. Investors took fright at the prospect of a huge rights issue and the shares plunged 20% on the day. They have lost further ground this month as more details have emerged, creating an ominous backdrop for a shareholder vote on the deal next week.
Shareholders are effectively being asked to double their equity exposure and then lever it up. The borrowing required, on top of $2.4 billion in fresh equity, would bring Cineworld’s net debt to four times pro-forma earnings before interest, taxes, depreciation and amortization, even after factoring in a boost from cost savings.
The cloudy outlook for Regal and other U.S. cinema operators adds to the risk. Movie-theater admissions were down 6% in 2017. The industry is debating whether the problem is cyclical—poor summer films—or structural—Netflix, Hulu and Amazon are eating away at the established relationship between consumers, movie theatres and Hollywood studios. “These secular shifts challenging the ecosystem are more developed in the U.S. than in Europe,” warns MoffettNathanson analyst Robert Fishman.
If the industry’s challenges are merely cyclical, as the Greidingers believe, it is valid to ask why Philip Anschutz, the billionaire controlling shareholder of Regal, is selling for $23 a share—a price the shares commanded a year ago, before the industry’s horrible 2017. Mr. Anschutz has been trying to sell the business for some years, and reduced his stake in 2016.
Proxy advisors are divided on the vote: Glass Lewis and ISS are respectively for and against. Yet the math favors the Greidingers: They need less than a third of external votes to achieve the simple majority required, given their 28% shareholding. The family’s management of Cineworld since 2014 has earned them good will among London investors. It also helps that they have pledged an extra $700 million or so to maintain their stake (using money borrowed from an unnamed sovereign-wealth fund). Regal’s shares trade around the offer price, so clearly the market thinks the deal will go through.
The tension may ease after next week’s vote. But whether the Regal takeout gets a Hollywood ending depends how well cinemas adapt to the waning power of the studio system in the Netflix age. One to keep watching.
Write to Stephen Wilmot at firstname.lastname@example.org