TD commentCineplex Inc. (CGX-T) C$8.79 WSJ Reporting CGX Looking to Buy Regal Derek J. Lessard Cheryl Zhang, (Associate)
Event The Wall Street Journal reported this morning that Cineplex has started early talks with Cineworld's (CINE-LN, not rated) lenders about acquiring Regal, the U.S.-based theatre chain.
Impact: MIXED
We have not spoken to Cineplex management ahead of publishing this note. The WSJ article makes the following points:
The companies held talks this year about merging operations while settling the legal judgment but did not reach an agreement.
The deal would reportedly be financed by debt and equity and backed by the merged business in return.
CGX would need to garner broad-based lender backing, and CINE has not signaled support for such a deal. CINE has the right to make its own restructuring offer to creditors before other alternatives can be proposed.
At this point, it is very difficult to know the merits of such (potential) deal without knowing any of the terms, but our initial thoughts are:
Substantial price tag but could be sweetened by the $1.24 billion liability owed to CGX: Assuming a multiple of 5-8x, we estimate that the purchase price could be anywhere between US$3-5 billion before potentially adjusting for the liability. That said, it is unclear to us how a deal would be structured given CGX's current market cap of only ~C$560mm.
Post-pandemic world could be very different for theatres: One concern we have beyond the price tag is that CGX would be doubling down on the movie business (and levering up to do so) at a point where there are still questions around the longer-term industry outlook, not to mention the higher competitive intensity in the U.S. on top of concerns around an economic downturn. Without further details, we think that having a sole focus on Canada where CGX has a sizeable market share and rebuilding the business appear to be the lower-risk alternative at this point.