TheChek News Flow

Potential rivals could face hurdles to interrupt Cineworld’s [LON:CINE] proposed takeover of Regal Entertainment Group [NYSE:RGC], a source familiar with the situation and two sector bankers said.

While Cineworld has been considered a possible takeover target in the past, potential rivals could face regulatory, financing, and shareholder hurdles to bid now, they said.

Cineworld announced plans to acquire Regal for USD 3.6bn in cash last month. Cineworld plans to fund the USD 5.8bn enterprise value deal with USD 4bn of new debt facilities and proceeds of a rights issue, which will raise about GBP 1.7bn (USD 2.3bn).

The acquirer’s largest shareholder could be an obstacle to a rival bid, the source familiar said. Global City Holdings [WSE:GCH], controlled by Israel's Greidinger family, has been invested in the company for a while and is keen to remain involved in the business, the source familiar said. Global City is fully subscribed to the proposed equity raise.

Global City declined to comment.

Potential bidders for London-based Cineworld might be more likely to target UK-based cinema chain Vue Internationalas it considers a sale or listing in the coming months, the source familiar said. This news service previously reported Cineworld and Vue have similar market positions in the UK, though Cineworld’s exposure to Eastern Europe was said to provide a greater growth profile.

Press reports have since valued Vue between GBP 1.6bn and GBP 2bn in a listing or sale; Cineworld currently trades near a GBP 1.6bn market cap after shares have fallen 12% since confirmation of the equity raise in November. Cineworld would have to pay Regal a termination fee of USD 20m in the event of recommending a superior proposal to the tabled deal, while Global City would have to pay USD 75m in the same circumstance.

Added to this, logical Cineworld bidders, including Vue Entertainment, owned by Omers Ventures and Aimco, and AMC Entertainment Holdings [NYSE:AMC], which owns Odeon, could face competition concerns, the first banker noted.

Cineworld operates 232 cinemas with 2,227 screens across Britain and Ireland, Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Romania and Israel, while Vue operates 211 cinema sites, 84 of which are in the UK, 36 in Italy, 33 in Poland, 30 in Germany and 21 in the Netherlands. Odeon operates 243 theatres in the UK, Ireland, Italy, Portugal, Germany, Austria, and Spain.

Vue could buy some of Cineworld’s asset but not all, the first banker said. Added to competition concerns, AMC would struggle to finance an offer as it is more leveraged than Cineworld, he said.

AMC had a net debt/EBITDA ratio of 5.6x and USD 260m in cash as of September 2017.

Other potential bidders for Cineworld could include US operator Cinemark [NYSE:CNK], but as of now it has not shown interest in acquiring European assets, the first banker said.

Estimated synergies from any other combination in the cinema space could be limited, the second banker said. It is challenging to make savings as costs are calculated at an each individual site rather than on a country basis, he said. Cineworld said it expects to have annual synergies at USD 100 million, including cost-cutting of USD 60 million, with additional restructuring benefits of USD 50 million a year.

Certain investors have voiced concerns about Cineworld’s decision to acquire Regal, the first banker said. The move lacks strategic rationale mainly because the US market is very mature and competitive. The lack of growth opportunity has spurred US players to expand in Europe, he said, mentioning AMC’s acquisition of Odeon in 2016 as an example.

Last month, this news service reported at least some shareholders’ concerns about leverage levels undertaken to finance the deal had been allayed. Earnings accretion from the acquisition could help mitigate the added leverage, while the top investor’s commitment to the equity raise as well as a portion of the break-fee had bolstered confidence in the transaction, the shareholders said.

Cineworld declined to comment. Regal did not return a request for comment.