Cineworld hopes to mount an escape thriller to rival Hollywood

When Cineworld, the world’s second-biggest cinema chain, admitted how close it was to collapse earlier this month, its management said that part of the problem was a lack of Hollywood blockbusters to pull in customers.

The company told investors that until the release of Black Panther: Wakanda Forever in November, the “limited film slate” would have a negative effect on admissions and on the liquidity of the debt-saddled business, which has been battered by lockdowns and the exodus of film fans to streaming services.

But while there has been a drought of entertainment on the big screen, an action-packed thriller played out in Cineworld’s boardroom, as its longtime boss ran out of options.

During the coronavirus pandemic, chief executive Mooky Greidinger twice brought Cineworld back from the brink of bankruptcy, persuading his lenders into agreeing a rescue package.

He had built his third-generation family business into a behemoth, riding a wave of easy credit to take control of UK chain Cineworld in 2014 and US-based Regal Cinemas in 2018.

Now, however, his company’s nearly $9bn in debt and lease liabilities — brought on by ambitious expansion plans colliding with the pandemic — look dangerously precarious, as ticket sales drag and a $1bn payout over the botched takeover of Canadian rival Cineplex looms.

At the start of last week, Cineworld confirmed it was planning a Chapter 11 bankruptcy filing in the US and similar proceedings in other markets. The US bankruptcy process is likely to be initiated within weeks, according to two people familiar with the details.

Before the pandemic, its stock traded at above 180p. By the end of this week, it was just under 2p a share.

A former Cineworld executive told the FT that resorting to bankruptcy would be “a serious emotional blow” to Greidinger, and his brother Israel, who serves as deputy chief executive officer.

“They eat, dream and sleep the cinema business; [Cineworld] was their baby,” he said. But he added that “hubris” had driven them to borrow too much in pursuit of the goal of supplanting US rival AMC as the world’s largest cinema chain. When the pandemic struck, the business unravelled.

During an Israeli court hearing in June over a dispute about local distribution, Mooky said that because of the pandemic “our life’s work collapsed”, according to local media. “I’ve been fighting every day to save what we have built. I hope we succeed but it isn’t certain,” he added.

Once the Chapter 11 filing is complete, Cineworld’s biggest lenders — which include US investment managers Invesco, Eaton Vance and State Street — will almost certainly seize control of the company. The remaining Cineworld shareholders will be wiped out in the bankruptcy process.

Mooky is expected to be given a stake in the restructured company, according to two people with knowledge of the details.

The restructuring will also allow Cineworld to renegotiate its $4bn of lease liabilities and reduce the size of its $1bn payout over the cancellation of its 2019 deal to take over Cineplex. Cineworld is still appealing against the case in the Canadian courts, with a final decision due in September.

Another option under discussion as part of the restructuring is to sell Cineworld’s eastern European operations to pay back a group of lenders, the people added. Cineworld declined to comment.

The law firm Kirkland & Ellis, along with restructuring consultancy AlixPartners and corporate advisory firm PJT Partners, are working on the restructuring.

But as Cineworld fights for survival, its executives, investors and industry rivals have been left to think about the wider lessons: did its breakneck expansion prove too risky, or are its problems symptomatic of an industry in terminal decline?

“In a normal world, Cineworld would be heroes right now but because of the epidemic they got caught out” by their high levels of debt, said an executive at a rival operator.

The Greidinger family has been in the cinema business for nearly a century. Mooky and Israel’s grandfather established his first cinema in Haifa in 1930.

But Mooky was the first in the family to develop a taste for international expansion. He expanded the company — then called Cinema City — into Hungary in 1997 and subsequently into the UK and the US.

A former Cineworld executive said the expansion had worked out “very nicely” until the $2.1bn Cineplex bid which, regardless of the pandemic, was “a bridge too far”. Tim Richards, chief executive of UK cinema chain Vue, had been working on a bid for the 160-site Canadian chain but pulled out.

When the Cineworld board met to approve the Cineplex deal, only one of the dozen board members raised any objections. “The final straw that broke the camel’s back was the Cineplex acquisition,” said a person familiar with the discussions. “Nobody was prepared to stand up to them and say this was the wrong deal at the wrong time.”

In its full-year results in March, Cineworld said it had “headroom” to cope with its debts provided US admissions — which make up two-thirds of revenues — returned to 85 per cent of 2019 levels in 2022. But according to data from Box Office Mojo, which tracks ticket sales, they were only 57 per cent of pre-pandemic levels in the first quarter.

At the end of June, Cineworld was due to make a $170mn payment to a group of former Regal shareholders and was expected to make a payment to banks for a revolving credit facility. Both were missed.

One short seller, who had been following the stock since last summer, said at this point Cineworld was “so stunningly and obviously bust” he more than doubled his position.

“For the last two years, we’ve heard [from the company] if only they get a James Bond film, if only they get Top Gun,” said Barry Norris, chief executive of Argonaut Capital, who has shorted the stock since the 2018 Regal acquisition. “It’s just all just smoke and mirrors to take away from the fact that the underlying business is just crap and they’ve got too much debt.”

Cineworld’s bankruptcy announcement has certainly rattled the wider industry. Last month, Vue, Europe’s biggest privately owned cinema chain, resorted to a debt-for-equity swap to stay afloat. AMC, which has even larger debts than Cineworld, has been boosted in recent years not by strong financials but by becoming a “meme stock”, popular among retail traders.

The pandemic did not just temporarily shut down the industry, but it has also sped up its decline, according to industry experts. “The heartland of cinema is young people and they broke the habit and are not returning,” said Alice Enders, a media analyst. “Cineworld won’t be the last cinema to go bust.”

Additional reporting by Christopher Grimes in Los Angeles