As if Cineworld had not had enough to contend with during the last 12 months, while fighting for its life during the pandemic, it has now been slapped with a costly court defeat related to the period.
The world’s second largest cinema operator said this morning that it will appeal against an overnight Canadian court ruling requiring it to pay £722m in damages to a rival it came close to buying.
Cineworld agreed to buy the Canadian company Cineplex in December 2019 for £1.64bn but pulled out of the deal in June last year due to the impact of the pandemic.
Cineplex, Canada’s largest cinema chain, subsequently sued it for breach of contract and last night the Ontario Superior Court of Justice found in its favour.
Cineworld said today it did not expect damages to be payable whilst any appeal is ongoing.
However, shares of the company – which before today had rallied by 200% since hitting an all-time low on 5 October last year – plunged by 40% on the news at one point.
The court ruling did not give Cineplex as much as it had hoped for.
The company had been seeking more than twice the sum it had been seeking in damages.
But Ellis Jacob, the chief executive of Cineplex, said: “We are pleased that the court found Cineplex acted properly throughout this difficult period in our history.
“With roots that go back over 100 years, we are proud of the relationships we have maintained through this process and remain steadfastly committed to our guests, shareholders and team across Canada and the United States.”
Buying Cineplex would have made Cineworld, which owns the Regal cinemas chain in the US, the biggest cinema circuit in North America by number of screens.
But the company argued, after it had been forced to close the majority of its venues around the world during the pandemic, that there had been a “material adverse effect”.
Cineplex scoffed, subsequently, that Cineworld’s decision had merely been down to “buyer’s remorse”.
Cineworld, in return, noted today that it had defended the case on the basis that Cineplex itself had “breached a number of its covenants”.
It added that it had “counter-claimed against Cineplex for damages and losses suffered as a result of these breaches”.
The company’s chief executive, Mooky Greidinger, must wonder what else the pandemic and its after-effects could throw at his business.
The Cineplex takeover was to be funded by Cineworld, which has 787 theatres mainly in the UK and the US, largely by debt.
The company had some $3.5bn worth of debt going into the pandemic.
While this might leave some observers feeling less than sympathetic towards Cineworld, others might ask what the company was supposed to do, given the way COVID-19 completely upended its finances.
Others might also observe the protectionist way in which the Canadian government – and, by extension, its courts – have behaved towards foreign bidders that have sought to take over companies in the country.
Just over a decade ago, for example, Canada blocked a $39bn takeover by BHP, the Anglo-Australian mining giant, of Potash Corporation of Saskatchewan.
Shortly after that, Canadian authorities blocked the London Stock Exchange from taking over TMX, the owner of the Toronto and Montreal stock exchanges.
It all goes to create an unflattering image of Canada as a country that is prepared to adopt a protectionist stance when it comes to its key businesses and industries.
Chrystia Freeland, Canada’s deputy prime minister, threatened only last week to impose tariffs on US exports over a proposed clause in US president Joe Biden’s Build Back Better bill under which tax credits of up to $12,500 would be available to buyers of electric vehicles built by unionised workers in the US.
This was interpreted in the US as an attack on US manufacturers.
That is not to say this court ruling is anything other than awful news for Cineworld.
Owen Shirley, analyst at the broker Berenberg, said it was “dire” for Cineworld and had “the scope to wipe out all the remaining equity in the business”.
And Ivor Jones and Douglas Jack, analysts at the investment bank Peel Hunt, told clients: “We believe the damages are in excess of Cineworld’s available resources.
“Cineworld may win its appeal or negotiate a resolution with Cineplex.
“Or it may be obliged to raise further capital on unfavourable terms.”
Cineworld appears to be on the receiving end of a brutal court ruling here.
However, as regular cinema goers will know, those with a seemingly reasonable case do not always emerge as victors.