Long-suffering shareholders in Cineworld (LSE: CINE) may have had a glimmer of hope yesterday. At one point during the day’s stock market session, the Cineworld share price was up by over a quarter.
That jump followed rumours that the struggling multiplex operator could be subject to a takeover bid from rival Vue International. Cineworld made no comment on those rumours.
Whether or not an offer from Vue does materialise, ought I to buy into Cineworld now? After all, the shares trade for just pennies after losing 87% of their value in the past year.
Massive business challenges
I do not see the Cineworld share price as a bargain. In fact I think it could turn out to be the opposite of a bargain: a value trap. That is what investors call a share that looks cheap but later sees its price fall further.
The company does have some things going for it. It has thousands of screens in multiple markets and long experience of running cinema chains. That may indeed be attractive to an acquirer. It could also form the basis of a successful business for Cineworld, which made post-tax profits of $180m back in 2019 before its business was hit by pandemic restrictions.
But I see a massive problem for Cineworld, which is its debt pile.
The business has over $8bn of net debt. So even if cinema attendance keeps recovering and the business turns a profit, I am doubtful about its prospects as a standalone operation.
Potential takeover target?
That seems to be the view of Cineworld itself, which has been examining the options of selling parts of its business.
So I would not be surprised if there are more rumours of possible suitors. After all, putting aside its debt, Cineworld has some very attractive assets. If a firm bid materialises, or just a credible rumour, that could help drive up the Cineworld share price again.
But that does not tempt me at all to invest, for two reasons.
Creditor priority
The first is a strategic reason based on my approach to long-term investing.
I am not a momentum-based trader, hoping to benefit from possible jumps in a share price caused by news flow. Instead, I seek to purchase stakes in what I think are great businesses selling at attractive prices and hold them for years. While Cineworld could have the makings of an excellent business, with its current balance sheet I see it right now as a terrible business.
A takeover offer might not push up the Cineworld share price anyway.
To me, it looks like a buyer’s market. Potential suitors know that Cineworld is on the ropes and many of them are hardly flush with cash themselves. Meanwhile, Cineworld has a line of creditors out the door who would have priority over shareholders in any bankruptcy proceedings.
Possible wipeout
Even if a purchaser is found for some (or all) assets, the proceeds may well all go to lenders. The shares could end up going to zero.
Cineworld has repeatedly warned that shareholders could be left with nothing in its restructuring process. I will not be going anywhere near the shares.
