Cineworld (LSE: CINE) share price jumped at the beginning of August after the company reported its results for the first half.
The results themselves were pretty awful. However, the market was focusing on management’s statement that the company was considering several strategic options for raising cash, including a US listing.
In particular, the update noted that following the acquisition of Regal in 2018, the US now accounts for a “substantial majority” of group revenues. This market also “remains a key market for future growth.“
It went on to add that the US capital markets are the “largest and most liquid in the world.” They also include a “large number of publicly listed cinema companies including peer group companies.“
These US-listed companies are “typically covered by a significant number of North American equity analysts with a wide domestic investor following.” Therefore, the firm is considering “options to maximise shareholder value.“
These may include a “listing of Cineworld or a partial listing of Regal in the US.“
The US option
It seems to me as if Cineworld management has been watching rival AMC‘s share price performance over the past 18 months. Frenzied investor buying sent shares in the cinema company surging at the beginning of the year. This allowed the corporation to issue more stock and raise cash to strengthen its balance sheet.
Even though the two businesses are roughly comparable, the lacklustre performance of the Cineworld share price means the company is valued at less than £900m today. AMC is worth nearly $25bn (£18bn).
If management does pursue a US listing, Cineworld’s valuation could re-rate higher. Compared to AMC, the stock could be worth more than 10 times its current price, in the best-case scenario.
But this isn’t guaranteed. Just because investors have been happy to buy into AMC recently, doesn’t mean they’ll repeat this performance with Cineworld. Indeed, much of the buying in AMC has been from smaller retail investors who’ve been using leveraged bets via the options market. This might not be sustainable.
The outlook for the Cineworld share price
That said, a US listing or spin-off could provide the group with a much-needed cash infusion. With around $5bn of debt and interest costs totalling $343m in the first half, Cineworld’s financial position is concerning.
If a US listing provides cash to pay down debt, the company’s financial position could change significantly. It may also drive a faster return to profitability.
While there’s no guarantee a US listing will help the Cineworld share price, I think, on balance, if the company can raise money and reduce debt, the outlook for the enterprise will improve significantly. And this may convince the market that the group deserves a higher valuation.
Still, despite this potential, I wouldn’t buy the corporation for my portfolio today. I think its outlook is far too uncertain, and there are other companies I’d rather own in my portfolio.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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