focusIR May 2024 Investor Webinar: Blue Whale, Kavango, Taseko Mines & CQS Natural Resources. Catch up with the webinar here.
London South East prides itself on its community spirit, and in order to keep the chat section problem free, we ask all members to follow these simple rules. In these rules, we refer to ourselves as "we", "us", "our". The user of the website is referred to as "you" and "your".
By posting on our share chat boards you are agreeing to the following:
The IP address of all posts is recorded to aid in enforcing these conditions. As a user you agree to any information you have entered being stored in a database. You agree that we have the right to remove, edit, move or close any topic or board at any time should we see fit. You agree that we have the right to remove any post without notice. You agree that we have the right to suspend your account without notice.
Please note some users may not behave properly and may post content that is misleading, untrue or offensive.
It is not possible for us to fully monitor all content all of the time but where we have actually received notice of any content that is potentially misleading, untrue, offensive, unlawful, infringes third party rights or is potentially in breach of these terms and conditions, then we will review such content, decide whether to remove it from this website and act accordingly.
Premium Members are members that have a premium subscription with London South East. You can subscribe here.
London South East does not endorse such members, and posts should not be construed as advice and represent the opinions of the authors, not those of London South East Ltd, or its affiliates.
"I agree with a lot that you say, however my main contention with you is the valuation of the company and how the debtors will move forward with it."
But these are bits I agree completely with Wellington on - so genuinely puzzled if you agree with Wellington on these things but not with me.
Hexam, sorry mate, just winding you up a little :-).
I agree with a lot that you say, however my main contention with you is the valuation of the company and how the debtors will move forward with it.
I completely disagree with wolf.
im also not familiar as to what level we still get a say under c11, then again although we may not like the proposal, it could be as cold as : Take X dillution or die
So in the end, what the court decides and what our best option is may well be the same. ie D4E or DEfault
Stanley - Basically the worse the outcome for CINE the more the increase in debt effectively is so the weaker I feel CINE's negotiating position will be. Likewise a really good result and their position is much stronger. Quantifying the impact of any of this is a different matter though. I'd like to think a really good result would have a big positive impact but just don't know - partly depends I suppose on what the lenders are already factoring in?
Hi Wellington - Again agree with much of what you say in another well thought out post.
One question though is do the shareholders have to agree a D4E in these circumstances? I know this is normally the case but in Ch11 doesn't it come down to the judge to decide on what he thinks is the best (or least worst) solution after hearing all the arguments? After all it's unlikely there will be any proposal that all stakeholders will agree on.
Thanks for the kind words - sometimes it's easier to get things straight in one's own head when one has to write it out longhand and hear other peoples' point of view.
@WolfofWarks - Yes, my pricing is based on a return to business as usual, although I allowed some slippage, in that it used 2019 numbers which was a year with a poor slate. And I agree that the industry does face headwinds which will be included as a discount in valuations which will err to the downside, much as @Penta points out. I guess it comes down to everyone's individual viewpoint which will differ and that's what makes a market (as they say!).
I think that what is becoming clearer in my mind is that the current SP drop may well be overdone. I assume a virtual total wipeout if Cineplex goes badly, mainly because that's the base position here and the SP is currently buttons, but there may still be a single digit pence per share value afterwards as @Hexam alludes to.
The one point that isn't factored in here is that at the moment is that the debt holders have the whip hand. The current management have run as far as they can and Cineworld has £4m in cash and is running on fumes. They have no options left and are price takers in any negotiation. They will have to take whatever is offered because there is no Plan B. I think that the Cineplex case being reduced would open up some alternatives and at that point hopefully we will get hedge funds piling in to the dirt cheap equity and fighting back for equity to get a larger slice of the pie. They only have to get the price up to (say) 20p to get a six or seven fold return - they don't have to get it back to £1! They will be well funded and advised and ought to level the playing field with the debt holders as there will be an equality of arms at that point. Also any D4E will need the shareholders to approve it and so one would expect them to fight their corner very hard, even up to the brinkmanship level of burning the whole deal and losing their stake. We have seen this in an number of other transactions - sometimes it worked and sometimes it didn't.
Anyhow, that's the bit of the knitting which I think is currently missing in the SP and I would say at the moment (SP 3p) that the risks are balanced to the upside.
@Hexam, when you say it depends in particular on the court case. Can you elaborate? How would it change Cineworld's situation if (a) the court halves the compensation, (b) orders to repay legal fees + a small fine for CINE pulling out of the deal?
What is confusing Poor? As I said I’m agreeing with Wellington and he’s said he’s agreeing with me. It’s very straightforward.
- Like me he thinks there will be a D4E
- We agree on the method of valuation
- We agree on the sort of level of that valuation will be but also that it is a large possible range
- We agree not all of the debt is likely to be involved
- We agree that shareholders could come out of this well (compared to today’s SP) but this depends on the valuation and the percentage taken by the lenders
- We agree though that we don’t know what this percentage will be and that it depends in part on the strength of the business and in particular the court case (though I’m more bullish on this).
So there’s no confusion here so not sure why you are trying to introduce any?
The only thing I’m confused about is why you are now agreeing with the above when you didn’t when I said them? I can only put it down to poor explanations on my part and for that I’m sorry.
Hi Wellington - very well explained post. My only beef would be that it's priced to perfection, whereas the current debt holders will be looking for a low ball valuation, or at least something more realistic. For example, and this is only in my opinion, the quality of cinema is rapidly declining (too many annual franchises and lack of originality) and PPV has obviously come to the fore, with big hitters like Star Wars and Lord of the Rings opting for a PPV box set format. This is big dollars moving away from film production and the cinemas. That said it can still be a valuable business with a decent income after a significant reduction in the debt.
Hexam, Wellington is agreeing with me, I’m agreeing with him, your agreeing with him, his agreeing with you in value of the business, wolf is agreeing with you and your not fully agreeing with him or something like that.
You have already confused everything lol. Welcome Hexam:-)
@Wellington - great post and indeed, yes, I am vigorously agreeing with you.
I’m bemused though that Poor is agreeing with you when he disagrees with me so much when I say the same thing. You obviously put it much better than me and I’m just glad he’s finally got the message.
The only thing I disagree with you on is the appeal. If we are unsuccessful in that I don’t think it’s necessarily game over, just that much harder.
Thanks again for getting the whole D4E thing across in a way that I clearly failed to do. In future I’ll just refer anybody to your post and say ‘that’s what I mean’ :)
Wellington, that’s what I like about you, you are open to different possibilities. ATB
@Penta
1) It was higher in 2018 so I'd tried to pick a number from just before covid but I agree it could be within quite a large range of values
2) As I just posted, I think that the D4E relates to around USD1.5bn not all of it.
@poorinvester
I think that we are all vigorously agreeing!
I agree with WoW and Hexam in that the value of the business is based on future cashflows discounted back to (say) 1 Jan 2023 which would give an Enterprise Value similar to 2019 (as I assume that the business going forward and valuation metrics remain unaltered - a big assumption but not outside the bounds of possibility)
If we do that, we then have to work out who gets what slice of the pie for providing enough working capital going forward and for writing off the excess debt accumulated during covid (assuming that the debt pre-covid was manageable but if it was too high then some of that might need to be included as well).
However I can't see any scenario where *all* or even a majority of the debt is converted into equity as that would be a very inefficienct capital structure.
I think it's also worth remembering that debtholders maximise their returns if the busines is kept as a going concern for current stakeholders as a distressed sale to a third party or even liquidation now would be at a knockdown price requiring them to take haircuts and in order for that to happen, they do need equity holders to play ball as they could play dog in the manger if they thought that they would get nothing.
Great summary Wellington althou, imo:
1. The valuation of 7bn is on the high end (i would say entreprise value, based on CFs is around 3.5-5bn)
2. I dont think we're gonna deleverage all our debt, prolly the near term and/or DIP amount
despite my personal lower Enterprise-valuation, i do think, in the event that PLEX is favorable, our dillution will be more limited. that being due to (i) possible new finance intrest and the already mentioned (ii) lower debt to be swapped
If only we had Judge Fudge...
As always wellington, it’s a pleasure reading your posts. Let’s see if hexam can reverse it and argue then change his mind and then include wolf lol.
Fudge Barbara is the main reason!
I think it's probably better if people concentrated on Enterprise Value when considering how the pie might be cut in any D4E transaction.
Using round numbers at the end of 2019 (which is pre-covid but post the markets starting to short cineworld because they didn't like the Cineplex deal) the Market Cap was £2.50 x 1.3 bn shares x 1.33 (GBP to USD) = USD4.2bn and Cineworld claimed a Net Debt figure of USD3.5bn and so the Enterprise Value was circa USD7.7bn.
In that year they also generated free cash flow (pre growth capex) of USD821m or post capex of USD449m - so a pretty decent business.
2019 wasn't a particularly good year, but it is probably a good base case for 2023 and beyond.
So, ceteris paribus, the Enterprise Value is likely to go back to around USD7bn when things pick up, except there is now (IIRC) around USD1.5bn of more debt and a contingent liability of circa USD1bn from the Cineplex award.
So the battle at the moment is between how much of the future enterprise value represented by equity can the debt holders snaffle by providing emergency liquidity now and pulling legal strings to swap the excess debt for future equity.
At the moment the share price suggests the answer is pretty much all of it, which I think is caused by the Cineplex overhang.
If that award is dramatically reduced, things will change rapidly and current equity holders will be in a much stronger position to resist a total wipeout. I would also expect to see activist hedge funds join party by hoovering up the equity on the cheap and then playing debtholders at their own game because the prize is the lions share of what will return to be a successful proven cash generative business.
I think everything now hinges around the Cineplex appeal - fail to overturn it and it's game over for equity holders, substantially reduce it to under (say) USD50m and then a return to the 20p to 50p range is entirely possible as that would equate to USD300m to USD750m in total.
Put it another way, if the excess debt built up over covid which needs to be swapped into equity to get back to the 2019 capital stucture and the equity value pre-covid was USD4.2bn then to convert that debt into equity for 90% control would still leave circa USD420m for current shareholders which is just under 30p in terms of share price( 95% is 15p and 99% is 3p.)
It's a punt but I think that there are a number of plausible ways out of this *if* the Cineplex claim can be substantially reduced.
Funny. This go to somewhere company is only green today on my screen. I too hope for 8p. A loss will still be enormous. I hope for mega trend in near future. GLA.
Should catch up with the US share price this morning
Poor - those loans have been purchased by the DIP lenders using the financing. Again in the court docs. They are building a position in terms of voting rights for the D4E.
Just to add, bank of Israel and other European landers have got their loans paid back. I think around 250 million of that cash injection was to pay off their loans. Bankruptcy laws are different in those countries. This is more proof that cine will most likely survive as it is.
Imho DYOR ATB Samaritans need to help the needy, not cine investors.
@Woodstock1970 - I think the actual mistake is not understanding that brands are far more durable than equity interests. A brand can continue to exist long after its equity owners lose all their capital. Look at all the brands acquired by Mike Ashley for £1 each over the years if you'd like an example. The risk of this is exacerbated when debt issuers hold strong cards.
Cant be arsed to type it all back out you've got blinkers on
ATB ;-)