Inside Cineworld's Offer To Purchase Regal Entertainment: How Would It Work?

Regal Entertainment Group (NYSE: RGC) announced after the close Tuesday that it's in discussions to be acquired by British theater operator Cineworld for $23 per share in an all-cash deal. On Wednesday, one Wall Street analyst said that while a Regal buyout comes as no surprise, the potential buyer does. 

The Analyst

MKM Partners analyst Eric Handler maintains a Buy rating and $20 price target for Regal Entertainment.

The Thesis

The proposed price of $23 per share is fair value and represents 9x MKM’s 2018 EBITDA estimate, the analyst said. (See Handler's track record here.)

A Cineworld buyout of Regal raises some eyebrows due to the fact that Cineworld has a smaller market cap than Regal and would need to aggressively leverage its balance sheet to complete a deal, according to MKM Partners. Cineworld currently owns 221 theaters and 2,049 screens in Europe, while Regal owns 561 theaters and 7,315 screens in North America.

“In fact, the reason this transaction might not be official, in our view, is Cineworld may not yet have all of its financing in place,” Handler said.

Cineworld carries net debt of $360 million and net leverage of 1.3x. Handler estimates net debt would rise to $6.26 billion following the Regal acquisition and net leverage would be a potentially troubling 6.4x.

Regal’s largest shareholder, Phil Anschutz, controls 27 percent of the stock’s shares and 69 percent of the shareholder vote, and Handler says Anschutz would likely not balk at the $23 offer price. Last year, Anschutz sold 25 million shares in a price range between $23 and $24 per share.

Price Action

After spiking 7.5 percent on buyout rumors on Tuesday, Regal stock is trading higher by another 5.6 percent Wednesday morning.

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