If Hollywood were to make a movie about Cineworld’s downfall it would be fast and full of plot twists, villains and with a spectacular punch-up at the end.
Corporate failures, in reality, are usually slow tales of overambitious management and debt-fuelled acquisitions punctured by events beyond the bosses’ control.
Mooky Greidinger, Cineworld’s boss, has turned the group into the second largest cinema operator in the US. But it has racked up $8.2bn of net borrowing, including leases, which even before the pandemic was close to five times the group’s 2019 ebitda. Now coronavirus has stopped the group in its tracks. Cinema-goers aren’t going, studios are delaying blockbuster releases and screen operators are being forced to draw the curtains.
After the James Bond movie launch was postponed again, Cineworld said on Monday it would suspend screenings in its primary US and UK markets. The top 20 releases represent about half of annual box office takings across the industry. The next 20 bring in nearly another fifth. Takings in the US from the Avenger’s Endgame out in 2019 totted up to more than $850m. The Bond delay, following Wonder Woman 1984 and Marvel’s Black Widow, sounds suspiciously like a death knell. Cineworld’s shares fell more than 40 per cent to a new low on Monday.
Closing cinemas will reduce Cineworld’s cash burn, estimated by the company at about $50m a month. But the company has to service the interest on its borrowings. The group, which made a pre-tax loss of $1.6bn in the first half of the year to June, looks almost certain to breach its loan covenants at the year end.
Cineworld is looking at funding options to tide it over until the studios resume production and start releasing pictures next year. Whatever it is, it will come at a high price. The interest on $250m in privately placed debt issued last month, and backed by the Greidinger family’s 20 per cent equity stake, is 11 per cent. Last week, rating agents Moody’s downgraded the group’s credit rating to Caa3 while uprating the chances of a default. It muttered about Cineworld’s unstable capital structure, the likelihood that it will run out of liquidity and the probability of a debt-for-equity swap.
Cineworld may hope for a waiver from lenders and that a vaccine will arrive early next year helping to draw crowds back to its theatres. Truth is, that would be an eleventh hour reprieve that even Bond movie writers might think far-fetched.
Handbags at dawn
Mulberry always wanted it to be handbags at dawn with UK fashion rival Burberry, Cat Rutter Pooley writes. Back in 2012, when Mulberry had a market cap of £1.5bn, it looked like it could get within swinging distance. No chance these days. Its shares are now worth less than £100m all-up; Burberry’s market capitalisation is £6.4bn. Luxury minnow Mulberry’s problems are more high street than high fashion.
Like other retailers, it is London rents and business rates that trouble boss Thierry Andretta. Locked into expensive leases, Mulberry wrote down the value of its retail outlets by £32m on Monday leading it to a £48m pre-tax loss for the 12 months to March. Though its addresses are upmarket — for instance, London’s Bond Street, where its tenancy isn’t up until 2025 — the problem is commonplace enough. Chocolatier Hotel Chocolat took £6.6m in similar impairments on leases last week. And small businesses across the capital have complained about the crippling cost of business rates if they are reinstated in 2021 as expected, after a year-long reprieve.
Mr Andretta laments empty office blocks as city desk dwellers have stayed working in the suburbs. Those affect sales of Pret A Manger’s £2-plus coffees as much as they do Mulberry’s £1,000 handbags. PwC reckons universal working from home could cost the UK economy £4.3bn in lower spending by office workers, even before accounting for knock-on effects down the supply chain.
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True, some of Mulberry’s problems aren’t shared by other retailers. Burberry wrote down its own store portfolio by £157m in May. Both will suffer from the global decline in tourist traffic, which analysts say usually accounts for around half the world’s luxury sales. Mulberry’s exposure to the government’s decision to end VAT refunds for overseas travellers to post-Brexit Britain hardly hurts the likes of H&M and Primark.
But many of Mulberry’s woes stem from its enduring overexposure to the UK. Two-thirds of sales were made in the country last year, a quarter of which were in London. Around 40 per cent of its sales in the capital come from overseas buyers. At Burberry, only £320m of £2.6bn in revenues came from customers in the UK during the year to March.
Burberry is FTSE 100 material. Mulberry is right where it should be — on Aim, the UK’s home for small and midsize companies. But Aim is also meant to be for growth companies. To deliver that, Mr Andretta may have a fight on his hands.
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