Is there no way home for the Cineworld share price?

The Cineworld (LON: CINE) share price hit a five-year high of 325p on 12 May 2017. It then gradually fell to 182p by 21 February 2020, before the advent of the covid-19 pandemic saw the share price collapse to 26p by 3 April 2020, as the chain’s cinemas closed during widespread global lockdowns.

By 19 March 2021, Cineworld had recovered to 122p, as the vaccine rollout allowed its cinemas to reopen. But as the pandemic dragged on, Cineworld’s share price slowly tumbled to 45p. And today, the Cineworld share price collapsed 33%, from 45p to 30p as I write, as the world’s second-largest cinema chain is hit by yet more bad news.

Cineworld share price: court case controversy

On top of its coronavirus-induced woes, the British-based cinema chain just lost an Ontario Superior Court of Justice case in Canada brought by rival Cineplex over a collapsed takeover deal.

In December 2020, Cineworld proposed a US$1.6 billion takeover of Cineplex which would have made it the largest cinema chain in North America. But in June 2020, Cineworld pulled out of the deal, at a time when coronavirus had seen most cinemas worldwide shuttered for months on end. Cineworld cited a ‘material adverse effect’ as well as Cineplex breaching the terms of the deal as reasons for pulling away. Moreover, it complained that Cineplex had been ‘unwilling to cure the breaches.’

But the Canadian Superior Court ordered Cineworld to pay US$957 million in damages to Cineplex, finding that the company ‘repudiated the transaction to acquire Cineplex.’ It also denied Cineworld’s counterclaim. Cineplex CEO Ellis Jacob commented that ‘we are pleased that the Court found Cineplex acted properly throughout.’

The key legal test was that Cineworld ‘breached its contractual obligations,’ as the agreement between the two companies contained an exclusion clause that expressly excluded outbreaks of illness as a reason for terminating the agreement. Cineplex called Cineworld’s withdrawal ‘buyer’s remorse.’ Cineworld will counterclaim, saying it will ‘vigorously defend this claim,’ adding that it doesn’t expect to pay any damages while its appeal is pending. Arguably, the pandemic could be seen as an extraordinary event not covered by the contract’s exclusion clause. However, with the precedent set, Cineworld may find it hard to win an appeal.

Can Spiderman save the day?

Peel Hunt analyst Ivor Jones believes that while Cineworld might win the appeal, or negotiate a different settlement, ‘the damages are in excess of Cineworld’s available resources.’ While the chain has already mooted a new listing in the US to generate some cash, it might find it difficult to entice new investors to buy stock, given that it’s already struggling with a mountainous $8.3 billion pile of debt. It’s possible that the company is finally at the end of its financial rope.

And cinemas globally have been suffering from the pandemic, as lockdowns shut them down for a large part of the past two years. Furthermore, with major film studios delaying important releases like James Bond: No Time To Die, cinema companies have had to take on additional debt. And while previous blockbusters such as Shang-Chi and Eternals enjoyed traditional cinema releases, others such as Black Widow and Cruella were released simultaneously on streaming, further eating away at the cinema business model.

Cineworld’s collapse today represents particularly poor timing, as the latest Marvel blockbuster, Spiderman: No Way Home, swings its way into UK cinemas this evening. The ninth solo Spiderman outing since 2002 is ambitiously attempting to tie together three generations of the character. And with its teaser trailer gaining nearly 80 million views on YouTube, it’s expected to be the first $1 billion+ film since the pre-pandemic release of Star Wars: The Rise of Skywalker in 2019.

Today was meant to be a cinematic renaissance. Instead, Cineworld shareholders might be left wondering if today’s court ruling means it’s spun its last web.

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