Will Cineworld’s share price be wiped out by restructuring?

Cineworld’s share price sizzled early last week after announcing it had failed to secure a buyer for some of its business. Yet the jump in the stock quickly faded, ending down on the week. With the entertainment industry still in recovery mode — and Cineworld’s share price trading for pennies — should investors consider the stock?

Cineworld’s [CINE.L] share price delivered something like box office performance on Tuesday after announcing it was abandoning plans to sell off its Eastern European and Israeli businesses. Cineworld executives said that offers received for the business “did not meet the value level required by the Group’s lenders”. The stock gained 47.36% on the day to close at 1.34p.

The so-called Rest of the World businesses generated $168.9m in revenue for the first half of 2022, compared to $266.8m for the UK and Ireland, and $1bn for the US.

Earlier this month, Cineworld had scrapped plans to sell off its UK, US and Irish business. Instead, the cinema chain will proceed with a debt-for-equity swap that will give control to its lenders, but could wipe out existing shareholders. The deal will raise $800m in new equity and $1.46bn of debt financing. The group told investors that the plan “does not provide for any recovery for holders of Cineworld’s existing equity interests”.

Chief executive Mooky Greidinger (pictured above) said this was a “vote of confidence” in the business, although reports have emerged that creditors are also seeking a change in leadership.

Cineworld hopes to restructure its $4bn debt pile in order to exit chapter 11 proceedings in the US. Cineworld filed for bankruptcy in the US Bankruptcy Court for the Southern District of Texas in the autumn. 

Cineworld’s share price slips again

Cineworld’s share price has flopped since the pandemic forced cinemas to close. Over the past two years, the stock has tanked over 99%, and is down more than 66% so far this year. The group’s last earnings report revealed it had burnt through $144.9m in cash for the first half of 2022.

Tuesday’s spike in Cineworld’s share price proved hard to maintain, with the stock falling the following day. By the end of the week, Cineworld’s share price had closed at 110p, a 21% decline from Tuesday’s peak.

Cineworld is the second-biggest cinema chain in the world, following its acquisition of Regal Cinemas in 2017. The group listed on the London Stock Exchange in 2007.

In comparison, AMC’s [AMC] share price has gained over 22% so far this year. AMC is the biggest cinema chain in the world. In 2022, total revenues were $4bn, compared to $2.5bn the year before, while adjusted net losses decreased to $973.6m.

Could Cineworld’s share price be a sleeper hit?

Responding to the announcement, Susannah Streeter, head of money and markets at Hargreaves Lansdown, said that “it’s little surprise” that Cineworld had failed to find a suitable buyer. Streeter pointed out that the rise of streaming giants and a shake-up in the industry meant that ticket sales will “never fully recover to the heady days of the past”.

Streaming services overtook cinema as a go-to entertainment during the pandemic. High-profile releases on services like Netflix and Amazon Prime this year include Knives Out sequel Glass Onion, starring Daniel Craig and Edward Norton.

Yet, there have been some bona fide blockbusters on the silver screen. The recent Super Mario BrosMovie earned £204m in its first five days of opening in the US. December release Avatar: The Way of the Water is now the third-highest grossing film of all time.

These big budget titles have seen an uptick in movie-goers. AMC announced that it recently experienced its busiest weekend of 2023 and its third-busiest weekend since December 2019, with more than 3.6 million people visiting the cinema chain in the US.

Cineworld’s share price is trading for pennies. But picking up the stock is potentially risky, considering the entertainment industry is still in recovery mode, alongside the internal restructuring that is currently in motion. Investors might want to see how this plays out before buying a ticket for the stock.