Israeli brothers Moshe and Israel Greidinger are set to become the biggest operators of movie theaters in North America after their Cineworld said on Monday it would buy Canada’s Cineplex for $1.65 billion in cash.
In doing the deal, the U.K.-based firm, whose origins go back to a cinema the brothers’ grandfather opened in Haifa in 1931, is betting big that movie theaters can effectively compete with online streaming services.
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Cineworld said the deal values Cineplex at $2.1 billion including debt and that it would take $2.3 billion in loans to finance it. That sent its London-traded shares down by as much as 9%. The 34 Canadian dollar ($25.56) per share offer is at a premium of 42% to the Toronto-based Coneplex’s closing price on Friday.
While movie theaters rely on big releases to generate gains, streaming services like Netflix and Amazon’s Prime Video are invading that space with direct-to-stream movies or releasing movies within a few weeks of their cinema debut.
“[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 of June 30, which was 3.3 times adjusted earnings before interest, taxes, depreciation and amortization. It said it would focus on bringing down its net debt to EBITDA ratio to around three times by end of fiscal 2021. The ratio is a key measure that can tell investors how long a company would take to repay its debt.
“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.
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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.
Cineworld traces its origins to Moshe Greidinger, a Romanian who arrived in Palestine via Britain in 1929. Shortly thereafter, he opened Ein Dor Cinema in Haifa. In the 1980s, as the chain called Cinema City, the Greidingers opened the first multiplex theaters in Israel and in the following decade began to Central and Eastern Europe.
In 2014 the company entered the U.K. and Irish markets by tying up with Cineworld and in 2018 became the second-largest movie theater operator in the world with the purchase of Regal for $3.6 billion. The Cineplex deal will add 165 theater and 1,695 screens to Cineworld’s network of 9,498 screens across 786 sites.
U.S.-based AMC Entertainment Holdings is the world’s largest movie operator. It has about 11,000 screens in 1,000 theaters, according to its website.
The Greidingers’ company, Global City Theatres, holds about 28% of Cineworld and also owns the Park of Poland theme park in Poland under development, as well as real estate.
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.