The future for Cineplex (Cineplex Stock Quote, Chart, News TSX:CGX) is highly speculative at the moment, according to Echelon Wealth Partners analyst Rob Goff, who in an update to clients on Wednesday changed his rating on the stock from “Tender” to “Under Review,” saying that COVID-19 has shifted the ground under the Cineworld deal.
Canadian theatre chain Cineplex provided update earlier this week on its state of affairs amid the ongoing COVID-19 pandemic, saying it would be shutting down its theatres across the country effective immediately, at least until April 2 when it would reassess.
At the same time, CGX commented on the proposed takeover deal by UK-based Cineworld, saying on the one hand that the period of review for the deal under the Investment Canada Act (ICA) has been extended through the end of March due to the COVID-19 crisis and on the other hand that even with a key clause of the deal being the Debt Condition that Cineplex shall have no more than $725 million outstanding under its credit agreement —and considering the impact of the pandemic on its business— management has underlined that it is “managing its business to reduce expenses in an amount necessary to offset declining revenues so that Cineplex is supporting its business and would be in a position to satisfy the Debt Condition.”
In his update, Goff said it’s clear by the market’s response in recent weeks —where CGX has fallen sharply from its perch close to the $34 mark offered in the Cineworld deal— that doubt has arisen as to whether or not the deal will go through, an assessment the analyst now shares, saying that with the extent of damage caused by COVID-19 to theatre companies everywhere still unknown, the government is calling for extra time to decide whether Cineworld will have the financial wherewithal to fulfill its end of the deal.
“While the agreement was exceptionally well structured, its completion is predicated on the government’s net benefit test under what are now very different circumstances. Both parties agreed under the structure to pursue actions to ensure approval; however, the government’s ability to approve or reject the transaction hinges on its view of Cineworld’s financial ability to deliver the net benefits within its agreement in addition to its view of the benefits within its representation with respect to the impact on Canadian cultural issues along with employment,” wrote Goff.
Indeed, Goff believes that Cineworld’s ability to fulfill its net benefits commitments is the key hurdle for the deal at the moment, rather than Cineplex’s debt ceiling.
“We view the key point of debate as the ICA’s view towards the ongoing ability of Cineworld to execute on the benefits provisions within its deal. The net benefit test includes the ability of Cineworld to execute on both its cultural and employment representations within the deal construct,” Goff said.
“Our move to place our prior Tender rating and forecasts Under Review reflects the uncertainty surrounding the theatre closings for Cineplex and the impact of the coronavirus on Cineworld as it applies to the ICA approval. Any rating, PT or forecasts, would be highly speculative at this point as the shares are subject to further volatility,” he wrote.