Cineworld share price: can the chain survive as it closes UK and US theatres?

• Cineworld is to close theatres as studios delay the release of new films
• Cineworld says they will reopen when the US has more certainty over when cinemas can open across the country, which will give studios the confidence to release new titles
• Cineworld is looking to raise more cash to weather the storm, but is already saddled with over $8 billion worth of net debt
• Cineworld shares are now trading over 87% lower than the start of 2020 and now sit at their lowest level since markets crashed in March

How many theatres is Cineworld closing?

Cineworld has announced it will be ‘temporarily’ closing all of its 536 Regal theatres in the US and 127 Cineworld and Picturehouse theatres in the UK from Thursday 8 October, 2020. This will impact around 45,000 jobs in total and represents the bulk of its 787-strong portfolio of theatres around the world.

Why is Cineworld closing theatres?

Cineworld has taken the drastic decision to close most of its cinemas because there isn’t a strong enough film slate to attract audiences.

The company was forced to close all of its theatres earlier this year as governments introduced lockdown measures but started to welcome back customers in its smallest markets, including Poland and the Czech Republic, in the middle of June, followed by the UK and Ireland in late July.

The problem, however, lies in the US, which accounts for 75% of Cineworld’s earnings following its acquisition of Regal Entertainment in late 2017. Although it managed to reopen many US sites in August, theatres in two major states – New York and California – remain closed as lockdown measures are being managed on a state-by-state basis.

Film studios have become accustomed to releasing new blockbuster film titles at the same time in different countries in order to streamline marketing activities and combat the threat of piracy. The fact theatres have reopened in some major markets but remain closed in others has made this difficult for studios, prompting them to delay the release of new titles or explore new ways of releasing films.

‘As major US markets, mainly New York, remained closed and without guidance on reopening timing, studios have been reluctant to release their pipeline of new films,’ said Cineworld.

Christopher Nolan’s film ‘Tenet’ has been the only blockbuster release since theatres reopened and the performance has been fair but far from inspiring. The list of films that have been put on the backburner continues to grow after it was revealed the new James Bond film, ‘No Time To Die’, will not be released in November as planned but in April 2021. And some studios are bypassing the cinemas altogether by launching new films via streaming platforms, led by Disney’s decision to premiere its new ‘Mulan’ film on Disney+.

Revenue plunged by two thirds to $712 million in the first half (H1) of 2020 from $2.15 billion the year before as theatres remained closed for most of the period, pushing it to a £1.58 billion pre-tax loss from a $117.4 million profit the year before.

The poor results were expected, but the focus was on how theatres had performed since being reopened after the H1 had ended. Cineworld said it was encouraged by the number of customers that had returned and said initial shows were sold-out in many theatres, even if they were operating at lower capacity.

The problem is that cinemas need audiences to return to give film studios the confidence to release their big titles, but they need the blockbusters to encourage people to return. This catch-22 is what poses the problem for Cineworld. Although studios have the ability to delay films or release them on streaming platforms, cinemas have to deal with the film slate they are handed and cannot survive without a strong set of titles.

Will streaming platforms be the death of cinemas?

The closure of theatres at a time when streaming services are going from strength-to-strength is proving catastrophic for the cinema industry, which now finds itself defending its role as the home of film. Cineworld has moved on the offensive against studios that think they can bypass theatres, claiming ‘there remains a significant difference between watching a movie in a cinema - with high quality screens and best-in-class sounds - to watching it at home.’

‘These streaming services are going through a period of growth, highlighted by new entrants such as Disney+, Apple TV+, HBO Max, however we remain convinced that the cinema provides a clearly differentiated proposition to these at-home activities.

Seeing a blockbuster movie on the big screen compared to watching it at home on a television (TV) or a mobile device is largely the same as how dining out at a restaurant and ordering a takeaway are very different consumer experiences,’ Cineworld said.

It was reported earlier this year that Cineworld had fallen out with Universal Studios after it decided to release ‘Trolls on Tour’ on the likes of Google Play and Amazon Prime Video rather than in the cinema as planned, and we can expect relations between theatres and studios to be tested further over the coming months and years.

When could theatres reopen?

Cineworld has not said when it plans to reopen cinemas. This will depend on when the US has ‘more concrete guidance on their reopening status and, in turn, studios are able to bring their pipeline of major releases back to the big screen.’

Cineworld’s to stretch finances further

There were already concerns that Cineworld wouldn’t be able to stage a strong enough recovery to serve its mountain of debt in 2020 H2 even if theatres remained open. Now that they are being closed again, it looks very unlikely that Cineworld will bounce back this year.

Cineworld – which is now worth just £380 million following the sharp fall in its share price - has already had to raise over $360 million worth of additional liquidity this year, and it now has net debt of almost $8.2 billion at the end of June, equally split between bank loans and lease liabilities. That is a huge amount of debt and one that cannot be dealt with if no income is coming through the door.

Cineworld previously said it had enough liquidity to survive into the middle of 2021, even if its cinemas had to remain closed for the rest of 2020. However, it conceded when it released its interim results that it was ‘assessing several sources of additional liquidity’ and that ‘all liquidity raising options are being considered.’

It also said it expected to fail covenant tests at the end of this year and next but that it anticipated securing waivers from the banks. It is unclear how the decision to close theatres again will impact its ability to secure favours from its lenders, nor the negotiations it is having with landlords that are owed over $4 billion.

Cineworld’s priority is to cut costs and hoard cash once theatres close later this week, but investors should expect the company to unveil a new financing package or equity raise in the near future. However, it is not ideal to ask for money from anyone – investors or the banks – when you already have a mountain of debt, no income being generated and no certainty over when cinemas will reopen again.

Cineworld has already pulled many of its levers, like deferring wages, securing government support and suspending dividends, and that means it will have fewer options at its disposal as the year goes on. The closure of theatres – and the impact it will have on 45,000 staff – is just the latest and most dramatic action taken by Cineworld to date.

The slump in Cineworld shares – now down over 87% since the start of 2020 – could also make Cineworld a takeover target. This could be attractive to other studios looking to consolidate during these tough times, a studio looking to add theatres to its portfolio, or by a company that thinks Cineworld may be better-off as a private company in the current climate. Still, a takeover would rely on the buyer having belief in the long-term future of the cinema industry, which is now in question as streaming sites gain traction.