• Charles Heighton

Cineworld shuts shop until a new blockbuster is released, but was this the only option?


By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets


The week began with Cineworld stating that it is closing all UK and US cinemas for an unknown length of time. This closure was forced by a further delay in the release of the new James Bond film. The logic is that without blockbusters, people will not return to cinemas. The stock fell 36.15% in Monday’s session because of this news.


Cineworld is the second largest cinema chain in the world with 530 cinemas in the US and another 127 in the UK. The company usually produces 90% of its revenue in these two countries, making this decision hugely harmful. The company also employs 45,000 people in these two geographies. These jobs are most definitely at risk. To be clear, these cinemas may never reopen their doors again under the current management.


The new Bond film was set to be released on November the 12th, which was supposed to boost cinema revenues. The end of the UK furlough scheme has also contributed to the shutdown. These factors have seriously called the viability of the business into question. Before the pandemic, Cineworld was already heavily indebted due to large acquisitions. Analysts estimate that even with the cinemas closed, cash burn is around $60 million a month. At the end of August, the company had $150 million in cash and access to $110 million in credit. This does not give it long to start producing revenue again.


Cineworld is trying to loosen the covenants on its debt by negotiating with their lenders. The debt will probably be restructured alongside significant cost cuttings. If this achieves nothing, the company will probably go bankrupt.


This is a dire situation and hindsight is obviously a problem. However, I cannot help but think that Cineworld’s management could have done a better job in this situation. The last major release was Tenet in August, which many cinemas reopened for. If the next big release was Bond set for November, did the management expect to coast until then on one major release? I cannot help but think that a temporary opening strategy around large releases would have been better to preserve capital and prevent pointless openings. Obviously, this would have been operationally complex and possibly not feasible.


Blame could also be laid at other doors. Film studios have delayed their releases with apparently little concern regarding the knock-on effects on cinemas. While they should focus on their own revenues, they should also consider the effects of these delays. Cinemas and studios arguably live in a symbiotic relationship; by looking after themselves, these studios may have condemned the cinema industry to a painful collapse. In the long run, this may harm the revenues of these studios.


The government also arguably bears some responsibility. The Chancellor's Eat Out to Help Out scheme was a success for the hospitality industry, but left businesses like cinemas unsupported. The Prime Minister's encouragement to go to cinemas is not a comparable incentive. While the furlough scheme was instrumental in keeping these businesses alive, its replacement may not go far enough when the situation is this dire. Cineworld may no longer be a viable business and as a result, it may not be a focus of this government; however, if it goes bankrupt, the job losses will be significant. Unfortunately, the previous foreign acquisitions do not lend themselves to support from the UK government, especially as the US footprint is far larger than the UK one.


Only time will bring this tale of woe to an end. I hope for the sake of those employed at Cineworld that the business survives and even thrives after the pandemic. However, I have to admit that right now I would not put a penny on this recovery.


Sources:

https://www.ft.com/content/1545e213-3d92-47e0-ac1b-7d92d39c92b1



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