Cineplex Starts Litigation Against Cineworld Over Failed Merger

(Bloomberg) -- Cineplex Inc. has begun legal proceedings against Cineworld Group Plc after the latter backed out of a deal that would have created the biggest operator of movie theaters in North America.

Toronto-based Cineplex is seeking damages including the C$2.18 billion ($1.61 billion) Cineworld would have paid to buy the company, minus the value of Cineplex securities retained by its holders.

It also wants to be compensated for other losses, including Cineworld’s failure to repay or refinance Cineplex’s C$664 million in debt and transaction expenses.

Last month, Cineworld scrapped the acquisition saying Cineplex breached the terms of the merger agreement and was unwilling to correct the situation. It pointed to a deterioration of Cineplex’s business amid the coronavirus pandemic.

But Cineplex dismissed that argument, saying London-based Cineworld is the one that breached its obligations.

“The contractual agreements between the parties expressly exclude outbreaks of illness, such as the Covid-19 pandemic, as a circumstance entitling Cineworld to terminate the arrangement,” Cineplex said in a statement Friday. “Cineworld intentionally chose to breach its obligations, including its obligation to seek timely regulatory approval for the arrangement under the Investment Canada Act.”

The coronavirus health crisis shuttered movie theaters across the world including Cineplex’s operations. Earlier this week, it reported a loss of C$178 million for the first quarter. The company acknowledged that the business will take a long time to recover from the pandemic.

Cineplex struck an agreement with lenders to relax financial covenants as it deals with an uncertain future after the failed takeover. Lenders will require it to raise C$250 million by the end of August, some of which must be used to repay existing debt.

The company shut all of its venues on March 16 and most remain closed, though it plans to open some outlets in six provinces starting Friday.

Cineplex shares have slumped 75% this year, making it the worst-performing stock on the S&P/TSX Composite Index.

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