Cineworld shares soar after Chinese tycoon buys significant stake

• Cineworld shares soar amid take private speculation
• Morgan Stanley pours water on deal rationale
• Cineworld struggles amid coronavirus pandemic

Cineworld shares have climbed 72% since hitting a four-month low after Chinese tycoon Liu Zaiwang acquired a leading stake in the struggling company, with investors speculating about a possible take-private deal.

Zaiwang purchased his leading shareholding of 5.1% in the company via his Jangho Group, helping to lift the troubled movie theatre’s share price from the 34p it closed at on 7 August to 60p per share at the time of publication.

Cineworld on its knees amid Covid-19

Cineworld, the world’s second-largest cinema chain, has struggled amid the economic fallout from the coronavirus pandemic, with the outbreak forcing it to close 787 theatres around the globe.

And even with lockdown restrictions easing this summer, its theatres have not had any new movies to screen, with studios opting to postpone the release of their latest blockbusters due to demand concerns as film buffs weigh up whether to risk their health in exchange for entertainment.

What does the future hold for Cineworld

Prior to Zaiwang’s investment in Cineworld, investors were already speculating the company could be delisted and taken private by its founder.

Investors got excited in August about takeover speculation after a US judge ended the ‘Paramount Decrees’, a set of antitrust rules from the 1940s that banned film studios from owning theatres.

The news, along with the rumours of Cineworld being taken private, led investors and city insiders to speculate that the group’s US business Regal, could potentially be targeted by a major Hollywood film studio now that the antitrust rules have been revoked.

However, not everyone is convinced by the deal rationale above, with Morgan Stanley stating that ‘the case for studios buying exhibitors has been weakened by the development of Premium Video on Demand (PVoD)’.

‘We think Covid has accelerated the maturation of the cinema industry, and with increased focus on direct-to-consumer streaming by the likes of Universal (new deal with AMC that reduced window to 17 days) and Disney (releasing Mulan on Disney+), we think the appeal for studios to vertical integration has reduced, not increased,’ Morgan Stanley wrote in a note.

The path ahead of Cineworld remains up in the air, but its new Chinese investor is a positive sign for company on the ropes and facing a myriad of headwinds.

Analysts at Morgan Stanley still believe the writing is on the wall for the beleaguered movie chain, with the investment bank forecasting its shares will fall to as low as 20p this year. However, that looks increasingly unlikely to happen given the stock’s recent surge and the possibility of a take private deal materialising.

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