Whatever you think of the Greidinger brothers, you can’t accuse them of lacking ambition. In the four years since they engineered what was effectively a reverse takeover of Cineworld by their Cinema City International, Mooky and Israel Greidinger, respectively chief executive and deputy chief executive of Cineworld, have forked out almost £100 million for five Empire cinemas while continuing to grow organically.
Yesterday’s confirmation that they are in advanced discussions to acquire Regal Entertainment Group, America’s second biggest cinema chain, for about $3.6 billion — or the thick end of $6 billion, when you factor in debt of $2.3 billion — would take things to a new level. Although a deal has yet to be agreed (and there is some vague talk of a counterbid), the mooted all-cash offer of $23 a share is below the 12-month high of $23.56 at which the shares were trading in February.
In its brief statement, Cineworld said that it intended to fund the deal through a mixture of debt and new equity to be raised by way of a rights issue. Putting their money where their mouths are, the brothers made a commitment that their Global City Holdings vehicle, which owns 28 per cent of Cineworld, would fully take up its rights under the issue, a not insubstantial financial commitment. Analysts at Stifel predicted a £1.6 billion equity-raising, which would double its equity base.
Importantly, the company reassured its shareholders that the nature of the proposed financing of the Regal acquisition, which, owing to the relative sizes of the two companies, would rank as a reverse takeover, would give the enlarged group sufficient flexibility to continue its present strategy of investing in the business as well as to maintain its policy of progressive dividends.
As investors had been given the impression that Cineworld would either buy something in Europe or return spare cash to shareholders, the announcement of a deal in America caused a few raised eyebrows and, with talk of an equity raise, sent the shares plunging by 20 per cent to 557p. However, analysts said that the timing of the move looked excellent, given that AMC, America’s No 1 cinema operator, is struggling under the strain of the debt taken on to fund acquisitions of the Odeon and Nordic cinema chains.
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As Regal’s share price trajectory this year shows, it also has been a tough year for the wider US cinema market, not least because of a poor slate of film releases in the key third quarter. Sentiment has been hit, too, by reports that Amazon is looking to set up a premium video-on-demand service, while the news that Walt Disney is taking an eye-watering 85 per cent of cinema revenues from the new Star Wars release has soured what should have been a hugely positive release.
To some extent, the recent spate of M&A in the cinema industry is a response to the brave new world of video-on-demand. A combined Cineworld/Regal doubtless would be capable of generating synergies of between £25 million and £50 million, providing the enlarged Cineworld with a few more years of growth.
Even without such a deal, the Greidingers insist that cinemas have a future, provided that they receive investment. Since taking the reins at Cineworld, they have continued to innovate to make the experience sufficiently exciting to entice people away from their smart TVs. As well as using the latest technology, such as 4DX, they have introduced Superscreen, a premium large-format venue, and a VIP format.
ADVICE Buy
WHY The backdrop for cinemas is challenging, but the Greidingers’ ambitions are worth backing, especially after the shares fell 20 per cent
Faroe Petroleum
Spinning the drill bit to look for oil and gas is a precarious business at the best of times. The price drop from almost $115 a barrel in 2014 to less than $30 by early last year made it even more risky.
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Faroe Petroleum, however, went into the industry downturn in better financial shape than many of its peers. As a result, it has managed to strike interesting acquisition deals while also keeping its exploration activities going. The latter undoubtedly is helped by its focus on Norwegian waters, where the taxation system means that 78p out of every £1 spent on exploration can be recouped. Yesterday it started drilling on its latest prospect, named Aerosmith, which is estimated to have up to 140 million barrels of oil.
Alongside that, the Aberdeen-based company’s balance sheet looks solid ahead of a few years of heavy investment as it starts to turn some of its oil finds into producing fields. A £75 million bond financing was completed this month, while Faroe has an untapped, reserves-based lending facility of nearly £190 million as well as cash of £117 million.
Graham Stewart, chief executive, is confident that production will treble over the next five years to between 40,000 and 50,000 barrels of oil per day simply from the assets that Faroe already owns and is developing. One of the largest contributors to that is likely to be the Brasse field, near the coast of Norway, which is tipped to be able to produce 30,000 barrels each day. Development of that is expected to cost in the region of £400 million, with first oil tentatively expected in 2021. The Fenja field further up the coastline is also expected to come into production that year. Oda, where Faroe has 15 per cent of the licence, is scheduled to start operating in 2019.
Faroe spends an average of $25 for each barrel of oil it gets out of the ground, so any further strengthening of the oil price will further improve the financial position of the business. Tighter global supplies have pushed the price towards $64 this week.
Its shares have recovered from less than 44p in January last year to be consistently around 100p in recent weeks, reaching 101¼p yesterday. Most analysts have a target price of more than 120p.
ADVICE Buy
WHY Faroe’s track record, financial position and clear road map to higher production