As I write, the Cineworld (LSE: CINE) share price has more than trebled in a little less than 24 hours. The long-term fall is still painful, mind. But could this finally be good news for long-suffering Cineworld shareholders?
The price jump is all about progress in Cineworld’s attempts to steer itself away from bankruptcy. The company filed for Chapter 11 protection in the US in September. That process gives a company a bit of breathing space to try to find a solution to its problems, holding the wolves back from the door.
One of Cineworld’s stumbling blocks has been rental payments, but the company has reached a settlement with landlords and lenders. As part of it, the cinema chain has agreed to pay at least $20m in rent. It previously did not intend to pay anything until Chapter 11 was concluded.
It means Cineworld can now go ahead with an extra $150m in borrowing, and with its plan to make a $1bn debt repayment. The important questions, though, are whether this signals an upturn in shareholders’ fortunes, and whether Cineworld shares are good to buy now.
I don’t want to read too much into this rapid climb. At its peak on the day the news broke, Cineworld shares nearly quadrupled from their previous market close.
I might expect that from an oil explorer hitting a major discovery. But not from a company that’s made progress in its bankruptcy, but is still up to its neck in it. Some of the reaction will be due to a bit of investor exuberance.
But there was plenty of shorting going on with Cineworld stock, and closing out some of those positions will surely have pushed the price up too. We’ll need to wait a bit and see what the market rates as a fair Cineworld share price now.
But neither the short-term market reaction, nor the current Cineworld share price, figure among my priorities at the moment. When I look at Cineworld as a possible investment, I care only about the long-term outlook for the company.
And I don’t think I see any real material change there. We’re still looking at a company with a market cap short of £100m, but which had net debt of $8.8bn on its balance sheet at 30 June 2022. It looks like the “comprehensive deleveraging transaction” that the company has repeatedly spoken of will still be needed.
I think Cineworld will be rescued in some shape or other. It does, after all, have some very attractive business assets in the form of its cinema chains. And I reckon the cinema business can still remain a profitable one over the long term.
But if I bought Cineworld shares now, I’d have no idea what level of dilution I might face by the time any hoped-for rescue deal emerges. I’ll still be keeping my eyes open for any further progress, though.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022