The world's second-largest movie theatre chain will apparently file for a Chapter 11 bankruptcy since they are unlikely going to meet its upcoming obligations.
Bankruptcies can sometimes be opportunities for deep value investors, as we have seen with Whiting Petroleum in 2020. I have even made a video explaining what one should look for if one wants to invest in a bankrupt company.
One of the things to look for is the details of the restructuring. When a company files for a Chapter 11 Bankruptcy, part of the equity is given to the bondholders for them to restructure the debt. In the case of Whiting Petroleum, 97% of the company was given to bondholders. As far as Cineworld is concerned, we don't have this information yet.
Therefore, I would advise that we wait for the details before we consider making an investment.
Can we calculate the intrinsic value in the meantime?
Looking at the balance sheet, we can see the main issue with the company, there's so much debt maturing by 2024.
The company took massive debt to make the acquisition of Regal Entertainment in 2017.
With the declining revenue growth for movie theatres with the growth of streaming platforms such as Netflix, Cineworld has chosen to grow through acquisitions. As we can see on the chart above, the main revenue growth in the past decade has been the two acquisitions.
These debts put additional expenses in terms of interest is one of the reasons why the company cannot be profitable. The company is also yet to recover from the pandemic.
If one were to buy invest in Cineworld today, one would be investing in a company with negative tangible book value, and this is not something advisable.
With Whiting Petroleum, the bankruptcy was in reality only a technical one (just like the bankruptcy of Texaco in 1987, where Carl Icahn made a fortune). Even in the worst-case scenario, the company could have been liquidated (at 2020 oil prices), and there would still have been some assets left for the shareholders.
In the case of Cineworld, there are not even enough assets for the bondholders. And remember, bondholders are always paid first in case of bankruptcy.