Short Sellers Dreamhttps://ca.finance.yahoo.com/news/cineworld-shares-collapse-700m-court-120851638.html
Cineworld shareholders have been told that the company could be worth nothing after it was ordered by a court to pay more than £700m in damages following the bungled takeover of a Canada rival.
Shares in the cinema chain plunged by almost 40pc following the decision by a Canadian court which ordered Cineworld to pay £722m to Cineplex after it scrapped a plan to buy it for £1.6bn.
Delivering the ruling, Judge Barbara Conway said testimony submitted by Cineworld’s chief executive, Mooky Greidinger, and finance boss Nisan Cohen, was contradicted by their text messages and other internal documents.
Mr Greidinger, his brother Israel Greidinger and Mr Cohen testified that they had intended to close the Cineplex takeover up until they accused the Canadian chain of alleged breaches of agreement last summer, Judge Conway said in her decision.
However, she said bosses’ communication “paints a very different picture”, showing that they were considering calling off the deal as early as mid-March and by the third week of April had no intention of proceeding with paying at the original offer price.
“By March, the pressure was on Cineworld to reconsider the transaction. Its share price was collapsing,” Judge Conway wrote in her judgement.
“Investors sent panicked emails to Cineworld’s executives, urging Cineworld to reconsider and walk away from the Cineplex deal.”
Judge Conway added that “on a balance of probabilities”, Cineworld’s bosses had “no intention of proceeding” with the takeover as it stood in April 2020 - despite waiting until June to terminate the deal.
She said: "Considering all of the evidence, I cannot accept the testimony of Messrs. Greidinger and Cohen that Cineworld remained intent on closing the transaction at $34 per share.
"On a balance of probabilities, that by mid-March Cineworld was considering its options. I find that by the third week of April, Cineworld had no intention of proceeding with the deal at $34 per share. Cineworld was assuring its shareholders that the transaction would not proceed at that price (or at all). Cineworld was assuring its bankers that the deal would not be going ahead at that price (or at all)."
Owen Shirley, a Berenberg analyst, described the judgement delivered by a Canadian court as “dire news” for Cineworld, adding it had “the scope to wipe out all the remaining equity in the business”.
Cineworld said it would appeal, a process that could take up to a year.
While that happens investors will have to consider if the company can balance uncertain box office takings with the need to finance its $5bn debt mountain.
The takeover of Cineplex, first announced in late 2019, followed Cineworld’s acquisition of American chain Regal in 2017.
Cineworld terminated the takeover deal in June 2020 over claims Cineplex had breached its obligations to keep debt below C$725m (£425m). Cineworld claimed damages of up to C$2.2bn.
But the Ontario Superior Court of Justice dismissed Cineworld’s claim and awarded judgement. It granted Cineplex’s claim, awarding damages of C$1.2bn for lost cost savings and C$5.5m for lost transaction costs.
One Cineplex investor said that Cineworld would be forced to hand over some of its shares as well as cash to the Canadian chain.
Nandeep Bamrah, from Hunsbury Capital said: "If the damages award survives appellate challenges, Cineworld may decide to issue equity to pay Cineplex (in cash and/or stock), and may commence discussions with lenders to renegotiate the terms of its borrowings."
The Canadian court’s judgement surprised bosses at Cineworld, which said in August that “no material liability will arise”.
Ivor Jones, an analyst at Peel Hunt said: “We believe the damages are in excess of Cineworld ’s available resources. Cineworld may win its appeal or negotiate a resolution with Cineplex. Or it may be obliged to raise further capital on unfavourable terms.”
Cineworld has been the target of short sellers, with about 15pc of its stock on loan. Wednesday’s share price drop could have led to a paper profit of about £37m for short sellers, according to Bloomberg.
New Holland Capital, Whitebox Advisors and K2 & Associates Investment Management are among seven firms with disclosed short bets against the company, according to Financial Conduct Authority data.
Cineplex shares are two thirds below the C$34 a share that Cineworld had offered in the deal.
Ellis Jacob, chief executive of Cineplex, said: “We are pleased that the court found Cineplex acted properly throughout this difficult period in our history.”