With FIG recapitalisations off the menu for the first time in years, a wave of M&A-based equity financings was expected to replace them in 2018. That wave, though, failed to materialise with just a few exceptions. And Cineworld was certainly exceptional.
The UK cinema chain announced a transformative acquisition of US peer Regal Entertainment Group in early December 2017 for an equity value of US$3.6bn, taking its 2,227 screens up to 9,542 and accessing the US box office with annual takings of more than US$10bn.
Doing so involved a £1.72bn rights issue that was larger than Cineworld’s market capitalisation of £1.54bn and would keep leverage in check at four times, well up from 1.5 pre-deal. The result was a hefty four new shares issued for every one share outstanding at 157p, a 34.1% discount to TERP.
A volume underwrite from joint bookrunners Barclays, HSBC and Investec in early December provided Cineworld with comfort from the off that the deal could go ahead.
“This was the most challenging risk in a very long time,” said Tom Johnson, head of EMEA ECM at Barclays. The rights issue was the largest in the UK since December 2015 and the second largest in EMEA in 2018 behind Bayer’s long-awaited €6bn capital increase in June.
The initial response was poor, with shares falling 20% when the deal was leaked. Having the Greidinger family, Cineworld’s largest shareholder with a 28% stake, onboard at announcement a few days later was vital. Barclays provided a margin loan that allowed the family to remain whole.
A deal that shot Cineworld from mid-cap to the fringes of the FTSE 100 index meant the banks couldn’t simply write a cheque and wait for shareholders to come in. There was no need to expend much effort on securing votes for the acquisition with the family already on board, which allowed everyone to focus on take-up. Management completed a global roadshow, meeting more than 115 investors between deal announcement and setting rights issue terms.
The result was a 96.3% take-up, an exceptional result even in a good market, which was rarely the backdrop in 2018. The VIX volatility index jumped from 13.47 in the days before subscription began to 37.32 on day one, before falling again to 20.60 by the day after subscription wrapped up. As a rule of thumb, ECM struggles once the VIX pushes above 25.
Even the rump showed heavy demand, with the top 10 orders taking around two-thirds of 40.38m shares sold at 238p, flat to the TERP at launch. Shares topped 320p in October.
“For a UK mid-cap, this showed an unprecedented level of ambition,” said Johnson. The same can be said of the banks that shouldered the burden against a shocking tape and the investors that bought into Hollywood’s dream factory.