This has proved a week to forget for Cineworld Group (LSE: CINE) and its beleaguered share price.
News that Omicron infections are doubling every two-to-three days has raised the spectre of half-empty cinemas as people stay at home again. Full lockdowns could well be just around the corner if infection forecasts prove correct too.
Its share price slide worsened considerably on Wednesday as news that it faces colossal litigation costs filtered through. The UK leisure share slipped as low as 27.06p at one point, the cheapest level since October 2020.
As a stock investor, I love to go shopping for bargains. Does Cineworld’s slump provide a terrific dip opportunity or should I avoid it like the plague?
Courting fresh trouble
Cineworld’s share price tanked almost 40% on Wednesday as news emerged that it will have to pay around £725m related to its scrapped takeover of Cineplex. The deal, which was agreed in December 2019 for a cool C$2.8bn, was abandoned in summer 2020 by Cineworld as the Covid-19 crisis intensified.
The Ontario Superior Court of Justice threw out its claim that Cineplex had breached covenants. It ordered the UK chain pay damages “of C$1.23bn for lost synergies to Cineplex and C$5.5m for lost transaction costs.”
Cineworld will appeal the decision, it said, adding that it doesn’t expect to have to pay up during the 30-day appeals period.
Balance sheet worries worsen
Such a colossal sum would be a sledgehammer blow to investor mood even under usual circumstances. Given that it will add extra stress to the fragile balance sheet, and comes at a time when cinema takings are in danger of tanking again, it couldn’t have come at a worse time.
It raises the prospect that Cineworld will have to undertake further rounds of emergency financial measures. Will it be forced to take on more loans, pushing debt servicing costs still higher and giving it less financial firepower to rebound from Covid-19?
Could it possibly have to issue new shares again, diluting shareholders’ holdings in the process? Remember, Cineworld had a staggering $8.4bn worth of net debt on its books as of June.
Will Cineworld’s share price drop to 0p?
Cineworld’s share price bounced on Thursday as dip buyers piled in. But I won’t be adding the beleaguered business to my shares portfolio.
I’ve remained convinced since I sold my Cineworld shares last autumn that it continued to walk a tightrope even as Covid-19 restrictions were eased. News of rebounding box office sales are all well and good (latest financials showed admissions in October at 90% of 2019 levels). They illustrated the enduring allure of the cinema that could drive profits at the firm sky-high again. But fresh trouble was never far away as the pandemic dragged on.
Things could get particularly dicey for Cineworld and its share price if the Omicron variant begins to run riot in the US too. The business sources around three-quarters of revenues from the States. For these reasons, I’d much rather buy other UK shares today.
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Royston Wild 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.