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Why Cinemark Holdings, AMC Entertainment, and Regal Cinema's Cineworld All Dropped Today

By Rich Smith - Aug 18, 2020 at 2:58PM

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A potentially dilutive debt offering drowns optimism over a grand reopening.

What happened

Last week, hopes that movie theaters might soon get back to the business of showing movies in theaters helped lift shares of first AMC Entertainment (AMC -4.01%) and then its cinema chain rival Cinemark Holdings (CNK 1.29%) as well.

Today, investors appear to be having second thoughts about that, with Cinemark stock falling as much as 12% (and staying there), UK-based rival (and owner of Regal Cinemas in the U.S.) Cineworld (CNNW.F -1.67%) (CINE 1.62%) falling nearly 12% before rebounding, and AMC still down 5.3% in 2:35 p.m. EDT trading.

Audience in a movie theater reacts with fear to what they're seeing on the screen.

Image source: Getty Images.

So what

What's got investors worried today? Well, last night, Cinemark announced that while its own grand reopening has already begun, in order to keep its doors open and lights on while movie goers slowly file back to their seats, it's going to have to sell $400 million worth of "convertible senior notes" (i.e., debt that can turn into stock if certain conditions are met). Investors in Cineworld and AMC, meanwhile, may be wondering if where Cinemark just led, their own stocks will be forced to follow as theater chains scramble for cash to tide them over until audiences return to the theater.

For its part, Cinemark says it intends to use the proceeds from this debt offering to pay off other debt for "general corporate purposes" and also for "convertible note hedge and warrant transactions."

Now what

All of that sounds very complicated, but here's what it boils down to:

Cinemark is already a company with $3.1 billion more debt than cash on its books, and it's adding more debt to its burden. It's engaging in some convoluted financial transactions about which few details have been disclosed. The company could very well end up converting its new debt into stock which will dilute those investors out of an as-yet undetermined amount of their ownership of the company.

And it's doing all this without yet having proven that movie goers will return to its theaters under threat of infection from an ongoing coronavirus pandemic. If all that doesn't give nervous investors an excuse to think about selling movie theater stocks, I don't know what would.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cinemark Holdings, Inc. Stock Quote
Cinemark Holdings, Inc.
CNK
$17.24 (1.29%) $0.22
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$24.44 (-4.01%) $-1.02
Cineworld Group plc Stock Quote
Cineworld Group plc
CINE
$21.33 (1.62%) $0.34
Cineworld Group plc Stock Quote
Cineworld Group plc
CNNW.F
$0.27 (-1.67%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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