Major Cineworld investor ‘uncomfortable’ with debt for Regal deal

12 Dec, 2017 5:48 pm

LONDON (Reuters) – One of the biggest shareholders in Cineworld has expressed concern about the company’s $3.6 billion takeover of bigger U.S. rival Regal Entertainment, saying it is uncomfortable with the debt the British business will take on to finance the deal.

The $23-a-share acquisition will transform FTSE 250-listed Cineworld into the second biggest cinema chain in the world by number of screens, with 9,542 in Europe and the United States. However, it has confounded expectations among some shareholders that the company would pursue smaller acquisitions in Europe and could even return cash to investors.

Richard Marwood, a fund manager at Royal London Asset Management (RLAM), which is Cineworld’s fourth-biggest shareholder with a 3.9 percent stake according to Thomson Reuters data, said the deal was “a bit of a surprise”.

“We’ve been slightly taken aback by the region – the fact that they’re going to the U.S. – and also just the sheer scale of what it is they’re tackling,” he told Reuters.

The takeover comes at a difficult time for the film industry, which is wrestling with falling cinema attendances in the United States as consumers’ viewing habits change amid the growing popularity of streaming services such as Netflix.

It also marks another stage of consolidation among cinema operators that has seen U.S. firm AMC Entertainment Holdings acquire Stockholm-based Nordic Cinema Group, the UK’s Odeon & UCI and America’s Carmike Cinemas.

Shares in Cineworld have tumbled by 21.5 percent since the British company said on Nov. 28 that it would require a “material equity raise” to help finance the transaction, after Reuters reported it was in talks with Regal.

When the two companies announced they had agreed a deal on Dec. 5, Cineworld confirmed it would fund the takeover by way of a 1.7 billion-pound rights issue and with debt.

That will see its leverage jump to about four times net debt to earnings before interest, taxes, depreciation and amortization, once the latter is adjusted for the $100 million of annualized pre-tax synergies the company expects from the deal.

The group’s leverage stood at 1.6 times at the end of last year.

Marwood said the Regal takeover changes “the debt profile” of Cineworld “quite dramatically”.

“The gearing is probably the aspect that makes me slightly uncomfortable,” he said. “But is this a management team that I would back to do a good deal and make money for shareholders? Yes it is.”

RLAM joins Jupiter Asset Management, a small Cineworld shareholder with a 0.3 percent stake according to Thomson Reuters data, in raising questions about the deal.

Jupiter fund manager Alastair Gunn said there were two reasons why he was unhappy with the takeover.

“First, they have taken on a lot of debt at a point in the economic cycle when I don’t consider it prudent to do so,” Gunn said.

“Second, with the U.S., Cineworld is buying into the most mature market in the world,” he said, adding that he believed other countries would present “more growth opportunity”.

Cineworld is led by chief executive Mooky Greidinger and the Greidinger family holds a 28 percent stake in the company through their vehicle Global City Holdings.

Global City and Cineworld’s directors, who hold about 0.9 percent of the shares, have said they will support the acquisition at a shareholder vote on the deal.

A spokesman for Cineworld did not return requests for comment.

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