Cineworld stock price struggles as a $1.65 bln deal to buy Cineplex collapses

Shares of Cineworld (LON: CINE) closed the week nearly 17% lower as the world’s second-largest cinema chain struggles to cope with the consequences of the COVID-19 outbreak. The stock price is likely to attract additional selling pressure after it decided to pull out of the $1.65 billion deal to buy Canada-based Cineplex (TSE: CGX). 

Fundamental analysis: Takeover deal falls through

Cineworld, the UK-based cinema chain, said it has decided to abandon its attempts to buy Cineplex for $1.65 billion. The British firm has justified such a decision as Cineplex’s breach in the merger agreement between the cinema operators.

“As a consequence of … Cineplex’s unwillingness to cure the breaches, Cineworld has notified Cineplex that it has terminated the Arrangement Agreement with immediate effect,” Cineworld said in a statement.

The original deal was announced in December and would potentially make Cineworld as North America’s largest cinema operator. Cineworld offered to pay $34 per share, which at that time represented a 42% premium on the chain’s stock price.

On the other hand, Cineplex rejected Cineworld’s claims and said that the decision is a “buyer’s remorse,” and a consequence of the COVID-19 outbreak. Moreover, the Canadian cinema chain operator said that Cineworld is the one that is avoiding its obligations under the merger agreement. 

“Cineplex believes that Cineworld’s allegations represent buyer’s remorse, and are an attempt by Cineworld to avoid its obligations under the [agreement] in light of the COVID-19 pandemic,” the company said.

“The arrangement agreement explicitly excludes any “outbreaks of illness or other acts of God” from the definition of material adverse effect”.

Two companies are now expected to take their row to courts in a battle over damages. The showdown between two cinema chain operators comes in a difficult period as cinemas around the world continue to be either fully closed or operating at a limited capacity. 

Technical analysis: Stock price rotates lower 

Cineworld stock price ended the week almost 17% lower despite trading near the 3-month highs at the week’s open. The price action touched the 100-DMA near the $100 mark and rotated lower to hit the 2-week low. 

Shares are now testing the ascending trend line, which is an important support in the short-term. The break of this support would open the door for a move towards the low $50s, where another support area is located.

Summary

Cineworld stock price closed the week nearly 17% in the red as the cinema industry struggles to reopen amid the COVID-19 outbreak. As a result, Cineworld has pulled out of the deal to buy Cineplex for $1.65 billion.