Cineworld’s five steps to recovery

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Cineworld Group PLC (LSE:CINE)’s interim results on Thursday offered some hope for investors in the battered cinema chain, which said it expects “strong trading” in its fourth quarter as the relaxation of lockdown restrictions unleashed pent-up for out-of-home entertainment in its core UK and US markets.


However, the figures also revealed the pain inflicted on the firm’s finances by the pandemic, with losses for the first half of 2021 running at over half a billion dollars, although this was down from a whopping US$1.64bn in the same period last year when the pandemic first struck.


The legacy of COVID-19 means Cineworld is in a delicate position and will need to consider several options to ensure a positive recovery.


Pay down the debt


The forced closure of all of its theatres during the pandemic left Cineworld haemorrhaging cash, mostly through rent payments, without generating any revenue from moviegoers.


As a result, the firm was left to rely on loan and investor fundraisings to support itself during the pandemic, and as a result, its net debt has ballooned to a massive US$8.4bn, nearly eight times its current market cap.


READ: Cineworld predicts strong recovery in fourth quarter as lockdown subsides


The group’s cash balance is also relatively paltry by comparison, sitting at US$452.5mln at the end of June which has since been supplemented by an extra US$200mln in loan last month.


The massive debt pile will leave many wondering how exactly the company intends to service it, especially with its outlook still quite unclear into the post-pandemic economy.


“Cineworld’s leverage has skyrocketed during covid and its debt burden will be an additional challenge through the recovery period”, said Harry Barnick, senior analyst at research firm Third Bridge.


Adapt to the times


With the looming debt burden, Cineworld is likely to reassess its revenue strategy going forward, with the pandemic having fundamentally altered the film release landscape in several ways.


The advent of same-day releases of blockbuster movies on streaming services as well as in cinemas has the potential to permanently reduce the number of customers going to cinemas for big-ticket events, with many preferring to pay an additional fee to view the movie in the comfort of their own homes.


Walt Disney Co became a notable participant in this trend last year when it released its live-action Mulan remake through the Premier Access segment of its Disney+ streaming service. Since then, the media giant has realised several major titles at the same time on streaming and in cinemas, most recently Marvel epic Black Widow, villain origin story Cruella and adventure romp Jungle Cruise.


While the company has flagged a “strong film slate” for the rest of 2021, including the delayed James Bond movie No Time to Die due to release at the end of September, the additional competition with streaming means it can no longer guarantee returns from such blockbuster titles.


With this in mind, Cineworld may need to diversify its revenue streams away from a reliance on mass appeal blockbusters and instead attempt to draw in audiences from arthouse, independents and other alternative types of film.


The group may also explore the option of ‘premium’ cinemas, where audiences are offered smaller screens, more comfortable seating and alcoholic drinks in return for pricier tickets.


Revive the Cineplex (TSX:CGX) merger


While its balance sheet may not like the idea, Cineworld could also boost its business by potentially reviving its aborted US$2.3bn merger with Canadian rival Cineplex.


The deal was abandoned last June as the effects of the pandemic forced Cineworld to assess its options in the middle of the first wave of lockdowns, particularly whether it could afford to blow such a large amount of cash on a merger when its own survival was in doubt.


While the deal ended on somewhat acrimonious terms, with Cineplex accusing Cineworld of breaching its merger contract, the prospect of consolidation in the weakened industry may appeal to some investors, especially in Cineworld can potentially secure a cut-price deal, while synergies could also help cut down on costs in the long run.


Draw in US investors


Aside from Cineplex, Cineworld is already exploring other potential options across the Atlantic, having said it is currently mulling a possible secondary listing on the US markets as well as possibly spinning out and listing its US operation, Regel, only three years after its acquisition.


Having another large pool of investors, and shedding part of the business, could help shore up the group’s balance sheet further and could prevent it from tapping the same shareholders for cash over and over to service its debt burden.


The firm may also be hoping to replicate the performance of its US-listed rival AMC Entertainment Holdings (NYSE:AMC) Inc, which narrowly avoided bankruptcy in January only to then see its share price rocket 1,470% as it became a darling of the Reddit-inspired ‘memestock’ buying frenzy.


Become a memestock?


The final option for Cineworld to revive its fortunes is to perform and full AMC impression and also try its hand at drawing in the memestock investing community.


The initial memestock rally in late January was initially sparked by a desire for a community of retail investors on the Reddit forum r/wallstreetbets to increase the share prices of heavily shorted companies and inflict heavy losses on hedge funds betting against the relevant firms.


With Cineworld currently the most shorted stock on the London market, with around 7.7% of its shares held in short positions according to website ShortTracker, its stock could prove a prime target for the same cohort of investors.


A large retail investor base could also help the firm resurrect its business, with AMC having offered its own retail shareholders various perks such as free popcorn and memberships to draw them into its cinemas as well as its stock.

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