Canada’s movie theater company Cineplex (CPXGF) said it started to take legal action to sue Cineworld Group (CNWGY) for damages after the UK-based theater chain “wrongfully” terminated its $2.8 billion takeover deal last month.
The Cineplex claim seeks damages, including about $2.18 billion that Cineworld would have paid upon the closing of the transaction for Cineplex’s securities, reduced by the value of the Cineplex securities retained by its securityholders. In addition, the claim demands compensation for other losses, including the failure of Cineworld to repay or refinance Cineplex’s $664 million in debt and transaction expenses. Cineplex said it has commenced legal action against Cineworld in the Ontario Superior Court of Justice.
Furthermore, the movie theatre operator intends to advance alternative claims for damages for the loss of benefits to its shareholders, and to require Cineworld to disgorge the benefits it “improperly” received by “wrongfully” terminating the buy-out deal.
“Cineworld’s actions to prevent the arrangement from closing in light of the COVID-19 pandemic is nothing more than a case of buyer’s remorse,” Cineplex said in a statement. “Cineworld intentionally chose to breach its obligations, including its obligation to seek timely regulatory approval for the arrangement.”
Cineworld on June 12 called off its deal to buy Cineplex, citing “certain breaches” of contract.
Shares in Cineplex have been hit hard plunging almost 80% so far this year as the lockdown mandates tied to the coronavirus pandemic kept its theatres closed. The breakup of the deal added to the operator’s woes with shares down 40% since the announcement. Cineplex declined less than 1% to $5.95, while Cineworld rose 5% to $3.90 on July 2.
BMO Capital analyst Tim Casey this month reiterated a Hold rating on Cineplex with a $8.9 price target calling 2020 a lost year as the Cineworld deal is heading to court.
“With theatre attendance dropping 29% and a variety of non-recurring charges, 2020 is effectively a lost year with no business in Q2 and an uncertain return in Q3,” Casey wrote in a note to investors. “Near-term priorities are cost containment and capital preservation. Covenant relief was provided by lenders but requires asset sales and additional debt or equity issue.”
In a more positive note, National Bank analyst Adam Shine earlier this month upgraded the stock to Hold from Sell with a $6.6 price target, saying that downside appears more limited following the share pullback after the deal termination and studio delays of key movies. Shine sees some room to reduce rent costs and believes the prospect of asset sales might be in the offing.
Overall analysts are cautiously optimistic about the stock with a Moderate Buy consensus and an average price target of $8.49 (43% upside potential). (See Cineplex stock analysis on TipRanks).
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