(Bloomberg) — Cineplex Inc. has a clear path to solving its debt problem. The problem is that it’s stuck waiting to receive cash from a competitor with a stretched balance sheet.
Canada’s largest cinema chain was awarded C$1.24 billion (US$970 million) in damages from Cineworld Group Plc by an Ontario court last year after Cineworld decided to back down from a takeover bid. Cineworld has not paid and an appeals court has set hearings for October.
Meanwhile, Cineplex Chief Executive Officer Ellis Jacob must weigh the odds that his Toronto-based company will see the money. According to data compiled by Bloomberg, the court ruling represents nearly half of Cineplex’s $2.5 billion enterprise value.
“We’re in a good position, but we still have to go through the process,” Jacob said in an interview. “We would have to see where they are, if they can even raise the funding, which is another challenge.”
Cineworld’s debt problems appear disheartening. It has a CCC rating from S&P Global Ratings, eighth below investment grade, and the stock has lost about two-thirds of its value since early last year on concerns about a potential default.
When Cineplex receives a payment from Cineworld, the first priority is to “get our leverage back to a level that we’re comfortable with,” Jacob said. The company received another extension to its financial covenants this week, but they will be reinstated in the fourth quarter. According to Bloomberg data, Cineplex’s second-quarter earnings before interest and taxes were just 1.1 times its interest expense.
Cineplex has retained Moelis & Co. and the law firm Goodmans LLP to provide advice on how “to maximize and monetize the value of the judgment,” the company said in a statement. Selling the claim is an option, Jacob said.
“Cinemagoers are back”
After experiencing some of the toughest pandemic measures in America over the past year, Canadians are returning to theaters. Cineplex had 11.1 million admissions in Q2, a 10x year-on-year increase as Covid restrictions were lifted and hit titles like Top Gun: Maverick, Doctor Strange in the Multiverse of Madness and Jurassic World : Dominion” hit the screens.
That helped Cineplex have its first profitable quarter since the pandemic began, earning CA$1.3 million, or 2 Canadian cents a share.
“Management has done an excellent job in managing the pandemic and the company is well positioned to once again capitalize on consumer appetites for theatrical releases,” Bank of Nova Scotia analyst Maher Yaghi said in a note to investors. “Box office receipts in North America clearly show that moviegoers are back in full force.”
Yaghi set a price target of C$16 for the stock, 43% higher than where shares were trading early Friday afternoon.
Cineplex also owns other entertainment businesses, including The Rec Room, a Canadian restaurant chain similar to Dave & Buster’s, and Player One Amusement Group, a distributor of video games and pinball machines across North America.
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