Cineplex, Cineworld trade salvos as trial opens

Both sides are seeking financial reparations after the $2.8 billion merger was scuttled.

The trial between Cineplex and Cineworld Group is underway in Toronto with the U.K. theatre chain defending its decision to cancel its $2.8 billion acquisition of the Canadian company.

Cineplex was in “tenuous proposition” as early as mid-February 2020, according to Cineworld, just days after shareholders approved the acquisition. However, the Toronto-based exhibitor says the U.K. theatre giant acted in bad faith by delaying the takeover – hoping it would default on a $725-million debt limit needed to secure the deal.

Opening arguments from both sides were outlined virtually yesterday before the Ontario Superior Court of Justice. Cineplex is seeking to recoup $2.18 billion in damages after Cineworld scuttled the Dec. 15, 2019 deal six months later, amidst a global COVID-19 lockdown that shuttered theatres both in Canada and the U.K.

Cineplex filed the lawsuit last July arguing that Cineworld had “buyer’s remorse” as a result of the global pandemic and its impact on the exhibition business.

But Cineworld lawyer Paul Streep said the deal failed after Cineplex “decided to finance itself off of suppliers, film studios and, eventually, landlords” due to cash-flow problems.

“You’ll hear evidence that reflects the real state of their concern over COVID and the real concern that was driving the restrictions on payables and deviations from the ordinary course, was the debt covenant, not COVID,” said Streep, of McCarthy Tétrault. “Abiding by the debt covenant was regarded as a tenuous proposition as early as Feb. 13, 2020: that is two days after shareholder approval.”

Cineworld is arguing it had every right to terminate the deal because Cineplex strayed from the “ordinary course” of business by delaying payments. “Cineplex’s strategy was to kick its problems ‘down the road’ covertly so that they would become Cineworld’s problems,” according to a statement of claim.

“Cineplex did what all other affected businesses, including Cineworld and its peers, did,” said Alan Mark, of Goodman LLP. “These actions were consistent with Cineplex’s obligations under the arrangement agreement to preserve the value of its business during the interim period.”

The 18-day trial is expected to continue until Oct. 22 and include testimony from both Cineplex president and CEO Ellis Jacob and Cineworld CEO ​​Moshe “Mooky” Joseph Greidinger.

News of the $2.8-billion deal emerged in mid-December of 2019, with Cineworld agreeing to acquire all issued and outstanding common shares of Cineplex for $34 per share in cash. Pending approval from shareholders, Investment Canada and the Competition Bureau, it was expected to close in the first half of 2020. Both sides were publicly saying they remained committed to completing the transaction as recently as May 8 last year. But Cineworld issued a notice on June 12, 2020, saying it was pulling the plug because it had become aware of “certain breaches” by Cineplex in relation to the deal.

Cineplex reported $103.7 million in operating losses in Q2 2021, coming in at $64.9 million in revenue; however, that number was a 195% increase from the $22 million earned in Q2 2020, showing signs of pandemic recovery. Cineplex has also launched a new subscription program to bring in additional revenue.