As Regal Owner Cineworld Goes Chapter 11, Studios Gauge Hollywood Fallout – The Hollywood Reporter

The September 7 Chapter 11 bankruptcy filing from Cineworld, the world’s second-largest movie theater company and owner of Regal Cinemas in the US, came as no surprise to observers. For many studio partners in Hollywood, that’s almost a relief. MKM Partners analyst Eric Handler said: “Look back to the late 90s, early 2000s. “History has shown us that movie theater operators over-exploited balance sheets. Their math is unwise. 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.

While box office receipts have enjoyed a notable rebound this summer – though not to pre-pandemic levels – Moshe “Mooky” Greidinger’s Cineworld is heavily indebted, operating 747 locations and 9,139 theaters in 10 nation, warned on August 17 that it was struggling to weather a dismal summer for Hollywood movies amid a dearth of new films. “Cinema operators are distributors with weak margins and high fixed costs,” said the Moody’s analyst. Fiona Knox. “Typically, businesses with such characteristics are not able to maintain high levels of debt.”

Investors appear to have pressed the panic button for the broader exhibition sector as Cineworld warned of a possible restructuring, sending shares of its peers also lower. “Cinema operators globally, with the exception of Cinemark, are burdened with debt, were acquired before the pandemic and have experienced continuous [capital expenditure] Knox said. “More challenging is the fact that operators are, for the most part, leasing movie theater locations – possibly under prime leases – and the lease liabilities are capitalized, thus forming a larger share of the burden. heavily indebted.”

But others find most US publicly traded exhibitors in a better position than Cineworld. “While we acknowledge that the relatively weak list of films cited by Cineworld is something all exhibitors are facing, given the large gap between mid-August and late October, we consider concerns Cineworld balance sheet concerns are a company-specific issue,” said B. Riley Securities Analyst Eric Wold wrote in a report last August. One more veteran studio executive on the evolving bankruptcy and its impact on the theatrical business: “On a scale of one to 10, this is three.”

Neither the AMC Theater, led by Adam Aron, nor the burden of debt. Cineworld’s net debt stands at $8.9 billion at the end of 2021, or $4.8 billion excluding leases. AMC’s debt amounts to about $5.5 billion as of this summer. However, AMC was able to leverage its single stock position with retail investors to avoid mounting debt. “AMC has an excessive balance sheet, but they received a gift from heaven with the unexpected and incredibly enthusiastic support of retail meme investors,” Handler said. And in August, AMC switched to “APE” with a special dividend in AMC Preferred Equity stock, giving the company the option to raise more cash in the future. The Wall Street analyst noted: “APE stock is now providing a source of equity for the business.

In its bankruptcy filing, Cineworld vented its frustrations about not having much luck despite exploring “potential opportunities other than its primary focus on increasing incremental financing” throughout 2021 and 2022. Company management concludes in the filing: “While Cineworld would, of course, welcome the liquidity of being a ‘meme stock’ like AMC, we have never been so lucky! “

S&P Global analyst Eugenia Armas wrote in an August 16 report. “It will also have significant deferred rental payments, which will continue to put a strain on its cash flow for up to three years after the pandemic is over. Therefore, we believe that Cineworld still needs to significantly reduce its debt and interest burden or its capital structure will be unsustainable.”

Therefore, it is not uncommon for Cineworld to have mentioned that they will “pursue a strategy of optimizing real estate in the US” to renegotiate lease terms. The company may also give up some movie theaters, allowing rivals the ability to infiltrate. “With this giving an opportunity for Regal/Cineworld to break some leases that may not be profitable, or boundaries, before any of the usual timeframes you could see some closures take place, “If those are losing theaters and aren’t attractive enough to operate, it’s probably going to be difficult for anyone to step in and buy them back. However, if there are any attractive properties,” Wold said. removed by Cineworld, I think all the other exhibitors will need to take a look.”

On September 13, Regal emailed studio distributors in Hollywood to inform them of dozens of movie theaters that would close at the end of operations a day later, a source with access to email said. These include three in Los Angeles and greater Orange County: Anaheim Hills 14, Calabasas Stadium 6 and Westpark 8 in Irvine. Other theaters are located in major Philadelphia markets; San Jose; Seattle-Tacoma; Cleveland-Akron; Portland; Fresno-Visalia; Greenville, North Carolina; and Amarillo, Texas. All of these are underperforming positions.

The studios are confident that most of Regal’s locations will remain open, although they do not rule out further closures of locations that are not doing major business. And there’s always the possibility that another cinema operator could take over some of the Reign locations.

And filing for Chapter 11 means that it’s common practice for the major studios to make a profit from every ticket sold, because they are considered “critical” suppliers, in bankruptcy parlance. . If some studios have to endure delayed payments over the summer, sources say, that ends the day Cineworld begins restructuring.

Source: Cineworld submit application

Pamela McClintock contributed to this report.

This story first appeared in The Hollywood Reporter September 16th issue. Click here to subscribe.

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