Cineplex Inc T.CGX

David Fawcett - Linkedin

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David Fawcett, MA, CFADavid Fawcett, MA, CFA • 2nd • 2nd Founder of Epic Capital ManagementFounder of Epic Capital Management 2d • Edited •

2 days ago

 

 

 

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Cineplex is positioning itself for a sale, again. After the failed acquisition by Cineworld in December 2019 for $34 per share, the company has concentrated on regaining its financial footing. With pre-pandemic performance largely restored, we anticipate that management will soon shift focus toward strategic exit opportunities. A competitive bidding process is expected. Epic Funds initiated its position at approximately $10 per share. The stock is around $11.80, and we foresee an exit valuation of roughly $20 per share, likely within the next year.

Cineplex has successfully rebuilt its financial performance to near pre-pandemic levels, demonstrating robust operational recovery and cash flow generation.

EBITDAaL and Free Cash Flow: Cineplex produced approximately $220 mln in EBITDAaL in 2019, and we project a similar performance in 2025. More importantly, free cash flow is expected to reach $100 mln.
Revenue Per Patron: Attendance has recovered to 80% of 2019 levels. However, management has offset this by increasing revenue per patron through higher ticket and concession pricing, as well as diversifying revenue streams with location-based entertainment initiatives.
Healthy Balance Sheet: Debt metrics are favorable, with D/EBITDA expected to fall below 2.0X by 2025. Furthermore, debt maturities have been extended to 2029 and 2030, providing financial flexibility.

Several factors suggest that Cineplex is preparing for a sale:

The 2020 acquisition attempt signals a willingness to entertain offers.
CEO Ellis Jacob stands to receive approximately $7 million in a change-of- control scenario, a significant incentive.
Conversations we have had with management have left us the impression they want to sell.
Recent actions, such as the implementation of a NCIB and the talk of potentially reinstating a dividend, appear designed to bolster the share price.

We anticipate robust interest from industry players and private equity firms:

Kinepolis: A European theater chain with a €1.1 billion market cap. While regulatory hurdles led Kinepolis to pause its pursuit of Cineplex in 2023, these challenges could be mitigated through strategic divestitures.

Cinemark: With a $4.3 billion market cap, Cinemark has publicly expressed interest in M&A, emphasizing the pursuit of “high-quality assets.” Cineplex’s financial stability and market position make it a prime target.

Conclusion

Cineplex has achieved a commendable recovery and is well-positioned for a sale. The alignment of financial stability, strategic management actions, and industry interest creates an ideal environment for a competitive bidding process. Cineplex’s current valuation at 6.5X EV/EBITDAaL is attractive, the 2020 takeout attempt was made at twice that valuation. A $20 exit remains a realistic exit target to us.

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