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As the theater giant shutters some locations, industry sources appraise the financial reverberations: “On a scale of one to 10, this is a three.”
The Chapter 11 bankruptcy filing Sept. 7 from Cineworld, the world’s second-largest movie theater company and owner of Regal Cinemas in the U.S., didn’t come as a surprise to close observers. For many of its Hollywood studio partners, it was almost a relief. “Look back to the late ’90s, early 2000s,” MKM Partners analyst Eric Handler says. “History has shown us it is unwise for theater operators to over-leverage their balance sheets. In a mature industry, it leaves companies in a precarious position in the event of a shock.” In this case, that shock was the COVID-19 pandemic.
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While the box office made a notable recovery this summer — although not to pre-pandemic levels — the debt-laden Moshe “Mooky” Greidinger-run Cineworld, which operates 747 sites and 9,139 screens in 10 countries, warned Aug. 17 that it was struggling to get through the summer doldrums for Hollywood tentpoles amid a dearth of new releases. “Cinema operators are distributors with weak profit margins and high fixed costs,” says Moody’s analyst Fiona Knox. “Typically, businesses with such characteristics are not able to sustain high debt levels.”
Investors seemed to hit the panic button for the broader exhibition sector when Cineworld warned about a likely restructuring, sending the stocks of its peers lower as well. “The cinema operators globally, with the possible exception of Cinemark, are debt-burdened, having been acquisitive prior to the pandemic, and have undergone constant [capital expenditure] programs to upgrade to meet the demand for the state-of-the-art cinematic experience, in terms of screens, sound and seating,” says Knox. “More challenging is the fact that the operators, for the most part, lease the cinema sites — possible under master lease agreements — and the lease liabilities are capitalized, thereby forming by far the larger part of the debt burden.”
But others see most U.S. publicly traded exhibitors in a better position than Cineworld. “While we acknowledge the relatively weak film slate cited by Cineworld is something that all exhibitors are facing, with a major slate gap between mid-August and late October, we view Cineworld’s balance sheet concerns as a company-specific issue,” B. Riley Securities analyst Eric Wold wrote in a late August report. Adds a veteran studio executive about the evolving bankruptcy situation and its impact on the theatrical business: “On a scale of one to 10, this is a three.”
Not that AMC Theatres, led by Adam Aron, doesn’t also have a big debt burden. Cineworld’s net debt stood at $8.9 billion as of the end of 2021, or $4.8 billion excluding lease liabilities. AMC’s debt load amounted to about $5.5 billion as of this summer. However, AMC has been able to leverage its unique meme-stock standing with retail investors to avoid a debt crunch. “AMC has an over-levered balance sheet, but they got a gift from the heavens with the unexpected and incredibly passionate support of retail meme-investors,” Handler says. And in August, AMC went “APE” with a special stock dividend of AMC Preferred Equity, giving the firm the option to raise more cash in the future. “The APE shares provide an equity lifeline now for the business,” the Wall Street analyst notes.
In a bankruptcy filing, Cineworld vented its frustration about not having had so much luck despite exploring “other potential opportunities in addition to its primary focus on raising incremental financing” throughout 2021 and 2022. Concluded the company’s leadership in the filing: “While Cineworld would, of course, have welcomed the liquidity of becoming a ‘meme stock’ like AMC, we were never so lucky!”
One challenge in restructuring is that Cineworld “will exit the pandemic with a heavier debt burden and a much higher cost of debt because it raised expensive debt during the pandemic,” S&P Global analyst Eugenia Armas wrote in an Aug. 16 report. “It will also have significant deferred lease payments, which will continue to stress its cash flows for up to three years after the pandemic ends. Therefore, we consider that Cineworld still needs to considerably reduce debt and interest burden or its capital structure will remain unsustainable.”
It is no wonder, then, that Cineworld has mentioned that it would “pursue a real estate optimization strategy in the U.S.” to renegotiate its lease terms. The company could also give up some cinemas, allowing rivals to potentially swoop in. “Given this will give Regal/Cineworld an opportunity to break some leases that may be unprofitable, or borderline, well ahead of any normal timeframe, you could see some closures take place,” Wold says. “If those are unprofitable theaters and not attractive enough to operate, it is probably unlikely that someone would want to step in and acquire them. However, if there are any attractive assets that are unloaded by Cineworld, I think all of the other exhibitors will need to take a look.”
On Sept. 13, Regal emailed Hollywood studio distributors to notify them of a dozen theaters that would close at the end of business a day later, says a source with access to the email. They include three in the greater Los Angeles and Orange County areas: Anaheim Hills 14, Calabasas Stadium 6 and Westpark 8 in Irvine. The other theaters are in the greater markets of Philadelphia; San Jose; Seattle-Tacoma; Cleveland-Akron; Portland; Fresno-Visalia; Greenville, North Carolina; and Amarillo, Texas. All are underperforming locations.
Studios are confident that most of Regal’s locations will stay in operation, although they aren’t ruling out further closures for sites that aren’t doing big business. And there’s always a chance that another cinema operator could take over some Regal locations.
And filing for Chapter 11 means that it is business as usual for major studios in terms of getting their take of every ticket sold, because they are deemed “critical” vendors, in bankruptcy parlance. If some studios had to endure delayed payments over the summer, that ended the day Cineworld began restructuring, sources say.
Pamela McClintock contributed to this report.
This story first appeared in the Sept. 16 issue of The Hollywood Reporter magazine. Click here to subscribe.
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