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Can the global spread of the coronavirus scuttle a months-old takeover
deal between Cineplex and British-based Cineworld Group PLC, just weeks
after shareholders of both companies overwhelmingly approved the deal?
Cineplex’s declining share price is clearly reflecting some rattled
nerves.
On Thursday, the stock closed in Toronto at $29.86, down $2.62 or 8.1 per
cent, and well below the $34 per share takeover price – offering an
intriguing, although potentially risky, arbitrage opportunity of $4.14 per
share or nearly 14 per cent if the deal closes as planned later this year.
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The global outbreak of the coronavirus has hammered theatre stocks in
recent weeks, based on concerns that people will be reluctant to attend
public events. On Wednesday, the producers of the latest James Bond film,
No Time To Die, announced that they will delay the film’s release from
April to November owing to a “thorough evaluation of the global theatrical
marketplace."
But Cineplex, in particular, was hit by a series of tweets on Thursday
from a short-seller arguing that the deal between the two companies could
either fall apart or be repriced because of the market turbulence.
“The market is indicating a [about] 90-per-cent chance of the deal going
through, which we think is horrendously mispriced. We estimate the odds at
50-60 per cent, with the market significantly underestimating the
desperation with which we think Cineworld will seek to break or modify the
deal,” Hindenburg Research said in one of its tweets.
Short-sellers profit when share prices fall, and U.S.-based Hindenburg
Research sees the potential for a big gain here: If the all-cash deal
between Cineplex and Cineworld fell apart, the short-seller expects
Cineplex’s share price could fall significantly more, to $15.
A spokesperson for Cineworld said in an e-mail: “We aren’t commenting on
any market speculation.”
A spokesperson for Cineplex was not available for comment. Hindenburg
Research did not respond to an e-mailed inquiry.
Theatre stocks were struggling long before the appearance of COVID-19,
owing largely to competitive threats from online streaming services from
the likes of Netflix, Amazon, Apple and Disney. These threats underscored
the deal with Cineworld, which believed that a larger global footprint
would help it cut costs.
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“Scale matters in this business,” Cineworld chief executive Mooky
Greidinger told The Globe and Mail in December, when the deal was
announced.
But the coronavirus has made a difficult situation worse. AMC
Entertainment Holdings Inc. has seen its share price slide 37.5 per cent
since Feb. 20, when stock markets began to reflect concerns that COVID-19
could weigh heavily on global economic activity. IMAX Corp. has fallen
14.2 per cent over this period.
Cineworld shares have fallen 35.9 per cent over this period, including a
13-per-cent decline on Thursday.
But the question is whether weak share prices and the spread of the
coronavirus are enough to scuttle a deal, if Cineworld wants to walk away.
The agreement between Cineworld and Cineplex in December specifically
mentioned that illness isn’t enough to trigger a material adverse effect
clause, which can provide an exit.
What’s more, theoretically it may be difficult for Cineworld to argue that
it has been harmed significantly more from the coronavirus than other
theatre companies, or that the coronavirus will weigh on theatre companies
for a long time – conditions that also make it difficult to walk away.
Julian Klymochko, CEO of Calgary-based Accelerate Financial Technologies
Inc., which produces hedge fund and private equity exchange traded funds,
said that merger and acquisition (M&A) deals can make attractive targets
for short-sellers because some investors can be easily spooked.
Story continues below advertisement
“I think the deal is likely to close, and people who step in and buy here
could be rewarded,” Mr. Klymochko said in an interview.
He added: “Every short report I’ve seen on a Canadian M&A situation has
been wrong, and the deals have closed.”
Can the global spread of the coronavirus scuttle a months-old takeover
deal between Cineplex and British-based Cineworld Group PLC, just weeks
after shareholders of both companies overwhelmingly approved the deal?
Cineplex’s declining share price is clearly reflecting some rattled
nerves.
On Thursday, the stock closed in Toronto at $29.86, down $2.62 or 8.1 per
cent, and well below the $34 per share takeover price – offering an
intriguing, although potentially risky, arbitrage opportunity of $4.14 per
share or nearly 14 per cent if the deal closes as planned later this year.
Story continues below advertisement
The global outbreak of the coronavirus has hammered theatre stocks in
recent weeks, based on concerns that people will be reluctant to attend
public events. On Wednesday, the producers of the latest James Bond film,
No Time To Die, announced that they will delay the film’s release from
April to November owing to a “thorough evaluation of the global theatrical
marketplace."
But Cineplex, in particular, was hit by a series of tweets on Thursday
from a short-seller arguing that the deal between the two companies could
either fall apart or be repriced because of the market turbulence.
“The market is indicating a [about] 90-per-cent chance of the deal going
through, which we think is horrendously mispriced. We estimate the odds at
50-60 per cent, with the market significantly underestimating the
desperation with which we think Cineworld will seek to break or modify the
deal,” Hindenburg Research said in one of its tweets.
Short-sellers profit when share prices fall, and U.S.-based Hindenburg
Research sees the potential for a big gain here: If the all-cash deal
between Cineplex and Cineworld fell apart, the short-seller expects
Cineplex’s share price could fall significantly more, to $15.
A spokesperson for Cineworld said in an e-mail: “We aren’t commenting on
any market speculation.”
A spokesperson for Cineplex was not available for comment. Hindenburg
Research did not respond to an e-mailed inquiry.
Theatre stocks were struggling long before the appearance of COVID-19,
owing largely to competitive threats from online streaming services from
the likes of Netflix, Amazon, Apple and Disney. These threats underscored
the deal with Cineworld, which believed that a larger global footprint
would help it cut costs.
Story continues below advertisement
“Scale matters in this business,” Cineworld chief executive Mooky
Greidinger told The Globe and Mail in December, when the deal was
announced.
But the coronavirus has made a difficult situation worse. AMC
Entertainment Holdings Inc. has seen its share price slide 37.5 per cent
since Feb. 20, when stock markets began to reflect concerns that COVID-19
could weigh heavily on global economic activity. IMAX Corp. has fallen
14.2 per cent over this period.
Cineworld shares have fallen 35.9 per cent over this period, including a
13-per-cent decline on Thursday.
But the question is whether weak share prices and the spread of the
coronavirus are enough to scuttle a deal, if Cineworld wants to walk away.
The agreement between Cineworld and Cineplex in December specifically
mentioned that illness isn’t enough to trigger a material adverse effect
clause, which can provide an exit.
What’s more, theoretically it may be difficult for Cineworld to argue that
it has been harmed significantly more from the coronavirus than other
theatre companies, or that the coronavirus will weigh on theatre companies
for a long time – conditions that also make it difficult to walk away.
Julian Klymochko, CEO of Calgary-based Accelerate Financial Technologies
Inc., which produces hedge fund and private equity exchange traded funds,
said that merger and acquisition (M&A) deals can make attractive targets
for short-sellers because some investors can be easily spooked.
Story continues below advertisement
“I think the deal is likely to close, and people who step in and buy here
could be rewarded,” Mr. Klymochko said in an interview.
He added: “Every short report I’ve seen on a Canadian M&A situation has
been wrong, and the deals have closed.”
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