Cineworld Group (LSE: CINE) has suffered more than most companies in the FTSE 250 since the Covid-19 crisis hit. The Cineworld share price has lost 87% of its value since the start of the year, while the index itself is down only 18%.
The company’s plight has been brought to our attention again since the second wave of Covid-19 infections has been sweeping across the UK. This time, all of the UK’s Cineworld cinemas were closed in early October. But Cineworld is one of the world’s largest cinema operators. And late last year it was all set to buy out Canadian rival Cineplex in a $1.3bn deal. So there must be a recovery investment opportunity here, mustn’t there? Well, if you see the Cineworld share price as a recovery bargain, I’ve got one word to say to you in response to that: debt.
But first, the firm has walked away from the Cineplex buyout. It just wasn’t feasible to go ahead with it in the current climate. But there’s still fallout from it, as it’s now facing a lawsuit which could be very costly.
Mounting debt
The problem is compounded by Cineworld using debt to fund its expansion in the first place. Companies can often get away with heavy debt during good times. But when times turn bad, they can find themselves with no safety margin left at all.
Cineworld recorded an operating loss of $1.3bn for the first half of 2020, compared to a profit of $389m in the same period in 2019. Net debt at 30 June stood at $8,192m. That’s huge, especially for a company with a market capitalisation of just $515m at the current Cineworld share price. And since the end of June, the firm’s liquidity position will surely have deteriorated even further.
Credit rating agency Moody’s puts the company’s leverage at around nine times earnings in 2020. And that makes me very wary of the firm’s solvency. My biggest question is whether Cineworld will even survive, never mind provide investors with any recovery profits. Some analysts are even suggesting the company could run out of cash within weeks, and might need a rapid injection of around $500m just to keep the lights on until the spring.
Cineworld share price heading to zero?
Where might any new cash come from? With Moody’s putting the lowest possible credit rating on Cineworld, I can’t see lenders rushing to provide it. A new share issue? I think it would have to be at such a discount to today’s Cineworld share price that shareholders could be diluted almost to nothing.
A buyout is another option. But anyone wanting to buy a whole cinema chain today would surely want it at a rock bottom price too. I’d never buy in the hope of making a profit from a takeover anyway, at least not a “Save the company” one. I’d expect it to be heavily in the buyer’s favour.
No, right now, Cineworld is a stock I wouldn’t touch with a bargepole.