Quote:
Originally Posted by Krovikan
So randomly while looking at another stock, Yahoo recommended I look at Cineplex, and wow something is confusing me there. They have a deal to sell at $34/share, but the stock is trading at 12.80. The buyer has reaffirmed this month they are going through with the transaction, shareholders have approved, they are just waiting on the Canadian government to approve, and locally the film associations seem to only want restrictions put on the purchaser to invest in Canadian produced content.
Other then people not paying attention, and looking at the fact that they are shut down, why is this stock so low? It's confusing me, shouldn't it be just below $34 like most buyouts that are this far along?
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Well yeah, and I don't disagree. But there are a couple factors. One is that this deal needs approval under the Investment Canada Act (which is supposed to happen June 1st). That's a binary outcome, and a lot of investors hate them. Then you have Covid and that causes a particular concern for Cineplex in that they have debt covenants on the deal.
So, if Cineplex exceeds the covenant, the deal is over. I have zero doubt that they'll do everything possible to stay under and frankly in doing the math I think they're under. So, take that FWIW. I also think that the Investment Canada issue shouldn't be a factor because no one thought that it was much of an issue in February, but there are some people who do want this blocked. So, that's a tougher one.
And in all honesty, while this could go at $34, you have a special situation here. It's approved by shareholders at $34 to be closed by June 30. But obviously, if you're Cineworld you're coming back and trying to get a better price, right? And if you're Cineplex you're telling them to pound sand, we've got a done deal. At the same time, the share price isn't saying that this is a done deal and the market clearly doesn't think that $34 is going to happen. The deal is over $2bn and the current market cap is ~$770m. All this adds up to a couple things (purely IMO):
A) The first hurdle is approval from the government on June 1.
B) Assuming that clears, the deal could well be renegotiated, and pushed back from June 30th and at a different price.
C) The debt covenant should be OK. It's not great, but they should be under and you have to know that they'll not want to be the reason that the deal fails.
To properly value this as an investor, you have to look at how likely you think that this is to actually close, the value it closes at and that is one factor. Then consider the value of Cineplex if the deal doesn't close. Say Cineworld walks...or approval doesn't come. What's the value in that event? And lastly, what's the value of a modified deal look like?