TheChek News Flow

More than 30,000 jobs affected as pandemic and film delays devastate cinema business

Cineworld, the world’s second biggest cinema operator, is preparing to close all its screens in the US and UK after further delays to the new James Bond film pushed its struggling business to the brink.

The indefinite closure of 90 per cent of Cineworld’s screens, which is expected as soon as this week, raises fundamental questions over the viability of the company and a cinema sector devastated by the pandemic.

In a fight for survival, Cineworld has already asked its lenders to show leniency over its debts. Last month the company posted a $1.6bn pre-tax loss for the first six months of the year, during which time its net debt rose to $8.2bn.

The closures include Cineworld’s 543 Regal theatres in the US and 128 cinemas in the UK, which were banking on November’s release of the latest James Bond to boost ticket sales.

The closures will last until a fuller list of Hollywood releases are confirmed, according to people familiar with the plans, suggesting the closure could extend into the first quarter of 2021.

More than 30,000 staff are expected to be affected worldwide, including 5,500 in the UK. The company has yet to disclose how many job losses it expects, or what arrangements it may put in place to encourage staff to return when cinemas reopen. Cineworld declined to comment.

The company has said it has sufficient access to loans and cash to survive into next year. It is keeping open its cinemas in smaller markets such as Slovakia and Hungary where local films have proved popular and restrictions are less stringent.

The MGM film No Time To Die had been due out on November 12 in the UK. The film will be the actor Daniel Craig’s last in which he appears as the British spy. It was the remaining blockbuster in a year that has seen the withdrawal of dozens of hundred-million dollar films because of the pandemic. 

Mooky Greidinger, Cineworld’s chief executive, told the Financial Times last month that the group had received assurances from MGM that Bond would come out as planned and that Cineworld was building up for a big release of the film across its multiplexes.

“We see a big appetite from customers to go back to the movies but they want a product,” he said.

However, returns on the Christopher Nolan science fiction epic Tenet, which debuted in September, suggest that audiences are reluctant to return. The film cost roughly $200m to make but has so far made only $41m domestically, according to industry site Box Office Mojo.

The delay of the Bond film leaves cinema owners without any big name releases until late December when Warner Bros’ Dune and Wonder Woman: 1984 are scheduled for release. 

Cineworld is in a fragile position having come into the crisis with high levels of debt following its $3.6bn acquisition of the Regal cinema chain in 2018. It had been in the middle of buying indebted Canadian group Cineplex when the pandemic hit and withdrew from the transaction. The two groups are suing each other for breaches of contract.

The Motion Picture Association and other trade groups this week made a plea to the US Congress for government aid for cinemas, warning that just over two-thirds of small and midsized cinema companies were in danger of failing due to the pandemic.

Milan payments providers aim to create European champion

Italian payments providers Nexi and Sia are set to finalise a €15bn merger that will create one of Europe’s largest fintech groups, according to three people involved in the negotiations.

The boards of both companies are due to meet on Sunday evening to approve a combination that has been under negotiation for almost two years. A deal could be announced soon after the meeting concludes.

The all-share deal would extend the pressure on Europe’s payments providers to consolidate further, increasing their size as online purchases intensify during the pandemic and as consumers move away from using physical cash.

Talks between the two Milan-based companies intensified this year after French payments operator Worldline agreed to acquire Ingenico for €7.8bn, to become the largest payment provider in Europe.

Under the deal, Nexi will approve a reserved capital increase for Sia, whose main investor is the private equity arm of Cassa Depositi e Prestiti, Italy’s state-backed investor, according to the three officials.

The new group will have a market valuation of about €15bn and it will be Europe’s largest payments provider in terms of merchants servicing, the people said. By combining their payments services and digital infrastructure, the companies aim to create a European payments champion with combined revenues of almost €2bn.

Nexi, which was floated last year in Europe’s largest listing, has an equity market capitalisation of €10.6bn. Analysts have previously put a value of €4.2bn on Sia, but people involved in the negotiations said it has been valued slightly higher.

Paolo Bertoluzzo, Nexi’s chief executive, is set to become chief executive of the enlarged group, the people said.

CDP will become the group’s single largest investor owning about 25 per cent of the merged entity. Nexi’s largest shareholders, Mercury UK, a vehicle of private equity groups Bain, Advent and Clessidra, and lender Intesa Sanpaolo, will be diluted. Mercury UK owns 33.4 per cent of Nexi and Intesa 10.5 per cent.

People familiar with the talks said the private equity funds would gradually exit the group and details on the company’s new governance will be announced in the coming days.

“Our investment is strategic and we believe combinations delivering growth in terms of scale and international dimension will give greater value to our exposure in the rapidly evolving digital payments space,” said Intesa.

The talks between Sia and Nexi broke down several times over governance and valuation issues. One of the main hurdles around the valuation was over the terms and the extension of the contract between Sia and lender UniCredit, its main client. The agreement was extended for another 10 years to 2036 and the parties came to an agreement on the payment of upfront commissions, two people said.

UniCredit is Sia’s largest client, accounting for about a fifth of its €733m revenue last year, according to Equita analysts. Nexi, Banca Popolare di Milano and the European Central Bank are among Sia’s other main customers.

Nexi and Cassa Depositi e Prestiti declined to comment. Mercury UK was not immediately available for comment.

Global goods sector drives economic recovery

Markets are reflecting sectoral shifts in the world economy as services lag behind manufacturing

The spectacular V-shaped recovery in the global economy has probably now come to an end with much more normal growth to follow.

Global output rose at an annualised rate of 34 per cent in the third quarter compared with the previous quarter, according to JPMorgan. Remarkably, given the scale of the economic fallout from the coronavirus pandemic, that would leave output only about 4 per cent below the pre-virus level attained in the final quarter of 2019.

The next big shift in the global economy is likely to depend on how manufacturing and non-manufacturing sectors — often described as “goods” and “services” respectively — respond to the economic shocks caused by the virus, and the possible arrival of a vaccine.

There has been no gap in the relative performance of the two sectors up to the third quarter. Goods output fell more than services in the second quarter and then rebounded faster in the third

However, it is becoming clear that the immediate prospects for the two sectors are very different. JPMorgan forecasts that the level of global goods output will surge by another 4 per cent in the fourth quarter, while services output will grow by only about 1 per cent.

The continuing surge in the goods sector is, to some extent, normal at this stage of a cyclical recovery. Growth in inventories, demand for investment goods used in production and an increase in sales of consumer durables typically kick in during this phase and that is indeed happening now. However, on this occasion, manufacturing output has also gained from the almost complete removal of virus restrictions on factory activity.

Furthermore, the demand for goods is probably benefiting from a shift in consumer spending. Some households are still choosing to avoid services such as hospitality and travel, and others are prevented from doing so by renewed lockdowns.

Household savings ratios have been very high because of government support, and there are signs that excess savings are now being allocated towards groceries, household goods, durable consumer items and cars.

In recent weeks, the worrying rise in the number of Covid-19 infections has led to renewed lockdowns, especially in Europe. Business surveys in the eurozone have shown that the recovery in economic activity in consumer services has moved into reverse. In contrast, similar surveys of eurozone manufacturing are at the highest levels in the recent rebound.

This widening gap between goods and services activity has not yet been fully replicated in US business surveys. However, Covid-19 cases there are rising again, even in areas like New York and New Jersey, which were severely affected by the first wave in the spring. Further lockdowns or other restrictions on consumer services seem probable this winter.

These renewed problems from the virus in the western advanced economies are very different from the situation in the newly industrialised Asian economies, notably China. Asian manufacturing activity has been boosted by exposure to increased global demand for goods, while service sectors are benefiting from their impressive control over the virus.

Macro investors have been focusing on the divide between the global performance of goods and services because this theme is now being reflected in the behaviour of the financial markets.

In the initial sell-off in global equity markets from September 2, goods-related sectors such as industrials and metals performed relatively well. Non-oil commodity prices have been surging for several months, while Asian currencies, including the renminbi, have risen strongly against the dollar and euro.

What about global inflation? In the most recent data for August, core inflation in the goods sector was running at 3.7 per cent on a three-month annualised basis, according to JPMorgan. That compared with only 0.5 per cent in the services sector. This is a completely different pattern from the norm in past years which have generally seen global goods inflation running well below inflation in services.

Most economists expect these shifts to prove temporary and to be reversed when a mass vaccination programme arrives. But that could be many months from now, at best.

If goods demand remains strong into next year, as seems increasingly likely, then both the bond markets and the central banks could be surprised by a further spike in global goods inflation before this episode is over.