Cinema sector faces challenges as home streaming takes off

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 sector faces with the popularity of streaming movies at home.

The owner of Regal cinemas in the US and operator of theatres in nine other countries said last week that lack of blockbusters was keeping moviegoers away and affecting its cash flows.

With the pandemic waning, a near-term shortage of big-budget films and the popularity of online streaming are threatening Cineworld’s recovery. AMC Entertainment Holdings also flagged a tough third quarter due to a slim film slate.

Cineworld, which had $8.9bn of net debt at the end of 2021 and having  said it was looking at ways to potentially restructure its balance sheet, said on Monday one option was a voluntary chapter 11 bankruptcy filing in the US.

“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 about 28,000 people.

Its share price 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 11.08am GMT. That compares with a peak of more than 310p in 2017. Rival AMC’s share price fell 30% in premarket trading.

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

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 lets a company 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 respond at once to a request for comment on the hedge fund’s remarks, said it was in talks with many of its big stakeholders, including lenders and legal and financial advisers, and reiterated any deleveraging transaction would lead to 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$1.23bn in damages for walking away from the deal.

Over the years Cineworld has expanded globally through acquisitions, including its $3.6bn 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 $4.84bn at December, and cash of $354m.
Reuters