Between 2016 and 2019, Mooky Greidinger, the chief executive of Cineworld (CINE) received total pay of over £10m, and his brother Israel, who is his deputy, received over £7m. Half of this came from long-term incentive plans (LTIPs): in every single year, the participants hit their stretch targets and received all the potential shares. That proved to be a problem when in 2020, the directors found that the outstanding LTIP awards were “unlikely to deliver any significant value”.
Performance conditions that consistently trigger 100 per cent pay-outs flag a problem. They imply either a brilliant performance or insufficiently demanding conditions. Cineworld’s directors would no doubt claim the former. Their strategy was to buy up cinema chains, refurbish venues with the latest technology, and turn watching films into a high-quality experience. As Anthony Bloom said after chairing Cineworld for a quarter of a century, “in my wildest imagination, I would never have thought that the group would become the second-largest cinema chain in the world with 787 sites in 10 countries at the end of 2019”. Since what mattered was expansion, the only measure of success used by the LTIPs was the growth in earnings per share. That was flawed. Acquiring competitors increases total earnings. Financing acquisitions mostly by debt makes little difference to the number of shares in issue. Divide the increased earnings by the number of shares and, hey presto, earnings per share goes up. Those pay-outs came too easily.
Cliffhanging company
Already by the end of 2019, the mounting debt was causing concern, but directors pressed on. A bid for Cineplex would have made Cineworld the biggest cinema business in North America. They believed that worries about being over-stretched were overdone because cinema-going was resilient to economic cycles. Audiences would continue to be boosted by blockbuster movies and the high level of cash constantly generated would rapidly reduce the debt.
But of course, we know what happened: a shock pandemic has rendered the old strategy reckless. The closure of its cinemas has turned Cineworld from being an apparently defensive stock into a target for short-sellers, and the Greidinger family, which has been in the cinema business since 1930, feels the pain more than most. It owns a fifth of the shares.
In April 2020, with the group in danger of breaching its banking covenants, $1bn was raised to meet its commitments through the lockdowns. Cost-saving measures included cutting the rent it pays, furloughing staff, renegotiating supplier terms and stopping all unnecessary capital expenditure. In June, the directors abandoned plans to buy Cineplex, and in November, they bought more time by raising another £450m. This included equity warrants, which commit Cineworld to create over 10 per cent more shares so that warrant holders can buy its shares for 41.49p, highlighting the risk that more debt-for-equity swaps might take place.
The Phantom
The top team has had its salaries deferred and its bonuses cancelled. No LTIP awards will be made in 2022 or 2023, but a one-off LTIP this year makes the executive directors and managers eligible for share allocations if the share price has doubled to 130p in 2024. A lower price, and they’ll get nothing. At 130p, new shares will be created equivalent to 1 per cent of those already in issue, of which the Greidinger brothers will each receive almost a third, worth £5.6 million. The team’s eligibility rises on a sliding scale to 4 per cent for a price of 190p. At 380p, the value to each brother would be worth £65 million, the maximum under the scheme. Shareholders will foot the bill - in theory, the creation of all these new shares would dilute the share price from 380p to 365p.
The size of the potential pay-out prompted proxy advisers to recommend voting against this new LTIP at the EGM on 25 January. It’s a phantom scheme. As a more conventional plan, it would equate to a 2021 conditional award to each brother of 17 million potential shares with an initial notional face value £11m.
As with Informa, SIG, Provident Financial, McBride and Future, which have also recently proposed awards contingent on share price movements, the objection is that the vagaries of the market are largely beyond the control of executives, especially since recoveries depend on how long the pandemic and its restrictions last. The immediate challenge for Cineworld’s executives is to balance ongoing cash commitments against the need to raise further funds. They can’t control the future flow of new film releases, but they can ensure that the group has a robust strategy in place to attract back audiences by reassuring them that the enclosed spaces of cinema theatres are safe again.
The Cineworld vote was essentially a clash between ESG concerns and pragmatic interests. Maybe the small majority who voted the LTIP through considered the odds against a recovery so great that if the group is turned around, shareholders would be mean-minded if they resented the value of the shares that would be created for the top team.
