Cineplex is for bottom fishers, this investor says

Questions over the future of Canadian movie theatre company Cineplex (Cineplex Stock Quote, Chart, News TSX:CGX) are front and centre these days, with the company facing the double trouble of COVID-19 and its now-shuttered acquisition by Cineworld.

But while the stock remains mired in lows not seen in over a decade, investors should be wary about buying this down-and-out name, says portfolio manager Barry Schwartz.

“We used to own Cineplex and we sold it last year, actually before the Cineworld deal, and then, of course, the stock went up to the $30s and now, no one saw the pandemic coming, a complete disaster for the movie business,” said Schwartz, chief investment officer at Baskin Wealth Management, in conversation with BNN Bloomberg on Monday.

“Cineplex has to pull all the levers to make sure it survives here and it's going to be entering a legal battle to try and force the Cineworld deal, which could lead to upside as they look to argue their case but it's too much of a mess,” he said.

“For me it's too uncertain and I'm not interested in bottom-fishing right now. We’re going to just watch on the sidelines,” Schwartz said. “It's not the type of business I want to be invested in going forward and it's unfortunate because I think the management team did an amazing job but, you know, sometimes things happen that you can’t control.” Cinexplex announced on Monday its plans to slowly reopen theatres across Canada, following on provincial moves of late to relax regulations on social gatherings. Starting in Alberta with six theatres opening on June 26, Cineplex will gradually reopen with social distancing modifications in place, including full reserved seating, staggered showtimes to
reduce lobby congestion and the closure of its VIP theatres for the time being.

The company said in a press release that COVID-19 will have “a prolonged negative impact on Cineplex’s operations” but that it “remains optimistic that the industry will recover over time” once consumer demand for theatre viewing of new films returns.

On its proposed takeover by UK-based theatre giant Cineworld, first announced this past December, Cineplex said last Friday that Cineworld had called for the termination of the $2.2-billion deal.

Cineworld reportedly nixed the acquisition on grounds that Cineplex failed “to operate its business in the ordinary course” leading up to the closing of the deal.

Meanwhile, Cineplex has said that it will be starting legal proceedings and seeking damages against Cineworld for breach of the agreement.

Aside from the takeover, Schwartz said the future of cinema is a big question mark for Cineplex, making owning CGX a dicey bet.

“I don't know what the movie theatre business is going to look like coming out of this. You know people now love watching Netflix and Disney and there are so many options,” Schwartz said. “Will people be comfortable going out to movie theatres? Cineplex has way too many movie theatres now. It's going to be a real issue.”

“There could be upside here because the movie slate in 2021 looks jam-packed and probably good. However, it's really going to be about consumer behaviour, he said.