Cineworld to countersue Cineplex in spat over abandoned $2.1bn deal
World’s second-largest cinema chain accused of ‘buyers remorse’ by Canadian riva
Cineworld, the world’s second-largest cinema chain, has announced that it plans to countersue Cineplex as it squares up for an expensive legal battle with the Canadian chain that it pulled out of buying last month.
The UK-based cinema group said on Monday that it would “vigorously defend” claims that it breached its obligations to complete a $2.1bn takeover of Cineplex, which it announced in December before the coronavirus crisis hit.
“Cineworld terminated the arrangement agreement because Cineplex breached a number of its covenants under the arrangement agreement. Cineplex did not remedy these breaches when given the opportunity to do so,” the company said in a statement, adding that it planned to pursue damages for its financing costs and advisory fees.
Under the terms of the deal, the sale would not proceed if Cineplex breached a level of C$725m ($535m) debt. On Friday, Cineplex said that it had C$664m of debt outstanding at the end of June.
The two companies have been wrangling over the completion of the takeover since the pandemic caused governments to close cinemas around the world.
On Friday, Cineplex stated that it would pursue around $1.1bn in damages from Cineworld, according to a claim filed at the Ontario Superior Court of Justice and seen by the Financial Times.
“This is a case of buyer’s remorse,” it said.
The Canadian company had been planning to go to court to try to force Cineworld to close the deal before the larger chain announced that it was pulling out in June, according to a person with knowledge of Cineplex’s thinking.
The basis for Cineplex’s claim against Cineworld is that, while the larger chain cited the “material adverse effect” clause as a reason for terminating the contract, events such as global pandemics were not included and Cineplex stated it could not be held accountable for financial changes caused by the crisis.
Cineplex declined to comment further on Monday.
A number of deals have been called off since the outbreak of coronavirus using material adverse effect clauses but none have gone to court.
Lawyers at New York law firm Paul, Weiss, Rifkind, Wharton & Garrison said in a note that the effect cited under these clauses had to be “durationally significant” and that it was not clear yet what the long-term effects of Covid-19 would be.
For cinema businesses that rely heavily on the gathering of large groups of people, the pandemic has been particularly tough as the majority have been forced to shut their screens and, once reopen, only operate at fractional levels of normal capacity.
They have also been hard hit by the delayed release of major blockbusters such as the latest film in the James Bond franchise, which had been due out in April but will now be shown in November.
“It will be very messy in the hand of lawyers what common sense should have resolved ahead of time,” said Giuseppe Bivona, a partner at Bluebell Partners, a former shareholder in both Cineworld and Cineplex who sold out of both positions shortly before the deal collapsed.
Analysts at Citi warned that “uncertainty over potentially lengthy and expensive” legal proceedings would weigh down on Cineworld’s share price, which has already taken a hammering from the crisis.
Shares in the company, which have fallen 73 per cent this year, were down 8 per cent following the announcement on Monday.