As current owner Cineworld goes to Chapter 11, Studios Gauge Hollywood Fallout –

The September 7th Chapter 11 bankruptcy filing by Cineworld, the world’s second-largest movie company and owner of Regal Cinemas in the US, came as no surprise to keen observers. For many Hollywood studio partners, this was almost a relief. “Look at the late 90s, early 2000s,” says Eric Handler, an analyst at MKM Partners. “History has shown us that it is unwise for theater operators to exaggerate 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.

Despite a sharp rebound at the box office this summer, albeit not to pre-pandemic levels, Moshe “Mooky” Greidinger’s indebted Cineworld, which operates 747 sites and 9,139 screens in 10 countries, warned Aug. . Hollywood stores are struggling to fill the summer gap amid a dearth of new releases. “The theater operators are distributors with low profit margins and high fixed costs,” says the analyst at Moody’s. Fiona Knox. “As a general rule, companies with these characteristics cannot sustain high indebtedness.

Investors appeared to hit the panic button for the broader exhibition sector as Cineworld warned of a possible restructuring, causing shares of its peers to tumble. “Theatre operators around the world, with the possible exception of Cinemark, are in debt, bought before the pandemic and have been struggling all along. [capital expenditure] Updated programs to meet the demands of the latest cinematic experience in terms of screen, sound and seating,” says Knox. “More challenging is the fact that most operators rent movie theaters – this is possible through master leases – and lease obligations are capitalized, generating much of the debt burden. .

But others see publicly traded US exhibitors in a better position than Cineworld. “While we recognize that the relatively weak list cited by Cineworld is faced by all exhibitors, with a large gap between mid-August and late October, we view Cineworld’s balance sheet concerns as a company-specific issue.” Riley. securities analyst Eric Vold wrote in a report in late August. He adds the studio’s veteran executive on the unfolding bankruptcy situation and its impact on the theater business: “On a scale of 1 to 10, it’s a three.”

Not that AMC Theatres, led by Adam Aron, isn’t deeply in debt. Cineworld’s net debt was $8.9 billion at the end of 2021, or $4.8 billion not including lease obligations. AMC’s debt was about $5.5 billion this summer. However, AMC was able to use its unique meme stock position with retail investors to stave off the debt crisis. “AMC has a super-leveraged balance sheet, but has been gifted from heaven with unexpected and incredibly passionate support from retail meme investors,” says Handler. In August, AMC received a special dividend in APE stock with AMC Preferred Equity, giving the company the ability to raise more cash in the future. “APE’s stock is now capital to the business,” says one Wall Street analyst.

In its bankruptcy filing, Cineworld expressed disappointment that it was not so lucky despite exploring “potential opportunities beyond the main focus to obtain additional funding” during 2021 and 2022. stocks’ like AMC, we’ve never been so lucky!”

One of the challenges of the restructuring is that Cineworld “will come out of the pandemic with higher debt and a much higher cost of debt because it incurred expensive debt during the pandemic,” S&P Global analyst Eugenia Armas wrote in an Aug. . . “You will also have significant deferred lease payments, which will continue to stress your cash flows for three years after the pandemic is over. Therefore, we believe that Cineworld still needs to significantly reduce its debt and interest burden, otherwise its capital structure will remain unsustainable.”

So, unsurprisingly, Cineworld has indicated that it is “implementing a US real estate optimization strategy.” renegotiate the terms of the lease. The company could also sell some theaters, which could allow competitors to enter. “As this will give Regal/Cineworld the opportunity to break certain leases that may be useless or borderline, earlier than usual, you may see some closures. it will happen,” says Voldi. “If these theaters are unprofitable and not attractive enough to operate, it is unlikely that anyone will want to step in and buy them. However, if Cineworld can offload any attractive assets, I think all other exhibitors should take a look. “

On September 13, Regal emailed distributors at Hollywood studios to let them know that a dozen theaters would close a day later, according to a source with access to the email. These include the three largest in the Los Angeles and Orange County areas: Anaheim Hills 14, Calabasas Stadium 6 and Westpark 8 in Irvine. Other theaters are located in Philadelphia’s large markets; in San Kho; Seattle-Tacoma; Cleveland-Akron; Portland; Fresno-Visalia; Greenville, North Carolina; and Amarillo, Texas. They are all inefficient places.

The studios are confident that most Regal locations will remain operational, though they haven’t ruled out further closures for locations that aren’t doing much business. And there’s always the chance that another theater operator will fill some of Regal’s seats.

And filing Chapter 11 means business as usual for the big studios because they are considered “critical” sellers, in bankruptcy parlance. While some studios had to bear late payments over the summer, that ended the day Cineworld began restructuring, sources said.

Pamela McClintock contributed to this report.

This story first appeared in the September 16 issue of The Gossipify. Click here to subscribe.