Quote:
Originally Posted by Slava
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?
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Thank you for the write-up, that was a great bit of information and along the lines, I was thinking (though clearly my ability to analyze this is nowhere near yours
). The talking points from Cineworld seems to point to them just wanting it close the deal fast, so modifying it would seem counterproductive to their public goals.
I bought some call options this morning, as it seems like a solid investment, even if they don't get $34, and approval probably would see some really positive moment, especially in this crazy market.