‘A big pay day’ for hedgie short-sellers: Cineworld slumps after £700m court ruling

Cineworld, the UK’s most-shorted company, had a terrible day today as its shares plummeted almost 40 per cent following a Canadian court order to pay out $900m (£722m) in damages and costs after it was sued for pulling out of a takeover deal with Canada’s Cineplex.

The damages payout, which Cineworld will appeal against, is worth more than the company’s market capitalisation.

It adds to a series of headwinds that the FTSE-listed Cinema chain has faced since the onset of the pandemic, as lockdowns forced it to close its 9,518 screens and battered its balance sheet.

Hedge fund investors have been swooping in on the beleaguered company as a result, and 9.5 per cent of its stock is currently shorted against it.

So for those short sellers betting on a fall in price, today’s 40 per cent slump could prove lucrative.

“For the hedge fund shorts this represents a big pay day and there could be more to come because of the death spiral nature of any deal,” Peter Sleep, senior portfolio manager at Seven Investment Management, told City PM.

“Cineworld management is in a tough spot. What seems likely though is that the existing shareholders will be heavily diluted and may not recoup their initial investment for a very long time.”

It comes after Ontario Superior Court of Justice last night handed down a judgement ruling in favour of the local firm.

It backed Cineplex’s claim, dismissed Cineworld’s counter-claim and awarded Cineplex damages of C$1.23bn for lost synergies to Cineplex and C$5.5m for lost transaction costs

Cineworld said it would appeal the decision.

Canada’s Cineplex said the board was pleased with the judgement and would have no further comment during the 30-day period during which either party can appeal the decision.

The takeover deal, originally announced in December 2019, would have seen Cineworld become North America’s biggest cinema operator, but the UK theatre chain walked away from the $1.65bn deal in mid-2020 citing breaches in the merger agreement by Cineplex.

Cineplex rejected those claims and accused Cineworld of avoiding its obligations under the agreement in light of the pandemic’s impact on the industry.

Analysts at AJ Bell commented on the investor fall and said: “The timing couldn’t have been any worse. The pandemic struck and it looked like Cineworld’s only way to survive this crisis was to bail out of the Cineplex deal, given that it had massive debt repayments and suddenly no income. Cineworld argued that Cineplex had breached certain parts of the agreement and so it pulled out of the deal. This resulted in a legal battle which has now ended in favour of the Canadian party.”