The biggest drama this year at Cineworld (LSE: CINE) has not been on the cinema chain’s screens. Instead it has been behind the scenes, as the heavily indebted company tries to stave off collapse.
In doing that it has raised the prospect of heavily diluting existing shareholders. Combined with ongoing challenges in luring cinemagoers back to the silver screen, that has pushed the Cineworld share price down to pennies.
After losing 93% of their value over the past year, Cineworld shares are now cheap – but does that mean they are good value as a potential addition to my portfolio?
Price and value
An important principle when it comes to investing is understanding the difference between price and value. As legendary investor Warren Buffett puts it, price is what you pay and value is what you get.
At face value, the Cineworld share price of less than 5p may look cheap. Indeed, the market capitalisation of the whole company is just £62m now. In theory, that means someone could buy the whole show for £62m. But if someone paid that amount for Cineworld right now, they would also have to take on responsibility for its debts. With $8.9bn of net debt at the end of last year, that is a massive undertaking.
If nobody offers to buy the chain, what will happen to shareholders? There is a fair chance that Cineworld will agree with its creditors some new arrangement, such as forgiving some of the debt, or pushing out its due date, in exchange for shares. Indeed, the company has said it is currently in negotiations with its lenders.
This week, Cineworld filed for bankruptcy protection in the US, something it described as “a court-supervised process that will provide a forum for efficient reorganisation of the Group’s business and balance sheet”.
Shareholders could well end up with nothing, or very close to nothing. I see Cineworld as a very risky share to buy at the moment and would not consider owning it in my portfolio. Despite the apparently cheap Cineworld share price, I do not think it is good value.
Could the Cineworld share price bounce back?
From a risk management perspective alone, there is no way I would buy Cineworld shares now. But is there a chance the current Cineworld share price could turn out to be a bargain if the business restructures its debts? After all, it operates thousands of screens and has a well-known brand.
In theory, the share price could rise from here. To limit shareholder protests, the group’s creditors may agree to leave something on the table for them during negotiations.
But why should they? The creditors include ruthless, highly sophisticated financial institutions whose only interest is getting their own money back.
Cineworld’s business may improve but that will not come fast enough to help shareholders, in my view. They are now at the mercy of debt negotiations in which they have little or no voice and effectively no negotiating power.
I do not expect the Cineworld share price to recover on a sustained basis in either the short or long term. The rewards here are uncertain but the risks are clear – and far too big for my appetite.
