(Reuters) - Cineworld (CINE.L) will buy Canada’s Cineplex (CGX.TO) for $1.65 billion in cash, making the British firm the biggest cinema operator in North America as it looks to tackle increasing competition from online streaming services.
Cineworld said on Monday the deal, which values Cineplex at $2.1 billion including debt, would involve it seeking $2.3 billion in loans, sending shares of the FTSE-250 .FTMC member down as much as 9% and erasing early gains.
The C$34 ($25.56) per share offer is at a premium of 42% to the Toronto-based company’s closing price on Friday.
While cinemas rely on big movie releases to generate gains, streaming services like Netflix (NFLX.O) and Amazon’s (AMZN.O) Prime Video are invading that space with direct to stream movies or releasing movies within a few weeks of their cinema debut.
“It (Cineworld) is effectively betting that Hollywood studios will consistently release films we all want to see, and that a recession won’t hurt demand for a trip to the flicks,” AJ Bell investment director Russ Mould said.
“If this doesn’t turn out to be the case then Cineworld could start to sink under the weight of its debt.”
Cineworld’s adjusted net debt stood at $3.3 billion as at June 30, which was 3.3 times adjusted earnings before interest, tax, depreciation and amortization (EBITDA).
It said it would focus on capital allocation to bring down its net debt to EBITDA ratio to around three times by end of fiscal 2021. The ratio is a key measure which can tell investors how long a company would take to repay its debt.
Earlier this month, Cineworld hinted at slightly lower annual performance and the deal comes nearly two years after its $3.6 billion acquisition of Regal cinemas, which made it the world’s second largest theater operator by number of screens.
The Cineplex deal would add 165 cinemas and 1,695 screens to Cineworld’s network of 9,498 screens across 786 sites.
Currently, U.S.-based AMC Entertainment Holdings (AMC.N) is the world’s largest cinema operator. It has about 11,000 screens in 1,000 theaters, according to its website.
“We see the cinema industry as broadly stable and are therefore positive about today’s earnings-enhancing acquisition ... although the debt level does make us grip the edge of our seat,” Peel Hunt analysts said in a note.
The deal also allows Cineworld to tap into the Canadian box office which grossed about $770 million last year. Cineplex has a 75% share of this market.
“Our immediate post-acquisition objectives will be to combine Cineplex with our U.S. business,” Cineworld Chairman Anthony Bloom said.
CEO Moshe Greidinger said on a call with analysts that he does not expect the deal to face any antitrust issues since Cineworld has no existing businesses in Canada.
Cineworld’s largest shareholder Global City Theatres B.V. - with a stake of about 28% - has agreed to back the deal.
Reporting by Tanishaa Nadkar and Pushkala Aripaka in Bengaluru; editing by Jason Neely and Emelia Sithole-Matarise