Cineplex is out with a convertible debenture offer that looks very strange. On the one hand it could be a reasonably safe way to play the potential upside if Cineplex wins its massive legal settlement with Cineworld or if Cineplex recovers greatly as the economy opens and the virus eventually goes away.
But a couple of strange things. The coupon on the convertible bond is estimated at 5.25% to 5.75% but could be higher or lower than that range (I imagine based on demand for the debenture). The conversion price is not yet known! On that basis I am not a buyer as I don’t like the unknown terms.
Cineplex is suing Cineworld for roughly $2 billion after Cineworld walked away from a contract to acquire Cineplex. It looks to me like Cineplex has a good case and could probably win in court. But I doubt that Cineworld could afford to make the payment and might then be forced into bankruptcy. So, Cineworld will fight this extremely vigorously and perhaps the most likely outcome is a far more modest cash settlement and even that could take years. A quick look at Cineworld’s balance sheet shows in US. dollars $12.5 billion in assets, $3 billion in equity but also $5.5 billion in goodwill that would be of highly questionable value given the virus situation and $3.6 billion in debt. On that basis I am skeptical that Cineworld could afford anything close to the Canadian $2 billion that Cineplex may well win in court.
I have not analysed it but my impression is that Cineplex has been very well managed over the years. It will likely survive. But it is facing a very bad situation for the next while. Its shares and this convertible debt have to be treated as quite speculative. They could payoff nicely but they are risky.