(Bloomberg) — Cineworld Group Plc shares plunged after a Canadian court ordered it to pay C$1.24 billion ($965 million) in damages to Canada’s Cineplex Inc., after the British chain walked away from a takeover because of the coronavirus outbreak.
Cineworld, the world’s second-biggest cinema chain, agreed to buy Toronto-based Cineplex for about $1.6 billion in December 2019 in an attempt to become North America’s largest operator of movie theaters. It scrapped the plan nearly six months later after the Covid-19 pandemic forced entertainment venues to close, and Cineplex sued for breach of contract.
The shares fell 28% in early London trading.
The judgment is “dire news for Cineworld” which has more than $5 billion in net debt and U.S. cinemas in major need of investment, said Berenberg analyst Owen Shirley in a note to clients. “This has the scope to wipe out all the remaining equity in the business.”
“Cineworld disagrees with this judgment and will appeal the decision. Cineworld does not expect damages to be payable whilst any appeal is ongoing,” the London-based company said in a statement late Tuesday. A spokesman said the appeal could take up to a year.
Cineworld had $650 million of liquidity at the end of the first financial half of the year, said Jefferies analyst James Wheatcroft.
Cineworld’s shares have slumped 29% this year after a 71% loss in 2020 as it tries to manage a large debt burden. It’s rated CCC by S&P Global Ratings.
As for Cineplex, Canadian theaters have reopened and the country has vaccinated about 80% of the eligible population, but it’s still struggling to attract moviegoers to its 161 locations. It reported 8.3 million theater customers in the third quarter, fewer than half the number it saw in the same period of 2019.
Cineplex shares are 65% below the C$34 a share that Cineworld offered in the now-broken deal. They have been among the biggest targets for short sellers in Europe, with 23% of the company’s free float out on loan, according to Markit data.
“We are pleased that the court found Cineplex acted properly throughout this difficult period in our history,” Chief Executive Officer Ellis Jacob said in a statement. The court also denied Cineworld’s counterclaim, Cineplex said.
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