Cineworld's $3.6bn (£2.5bn) offer for the Regal cinema chain in the US could be in trouble, as influential shareholder group ISS has advised investors to vote against the deal.
In a voting recommendations document seen by City A.M., ISS said a vote against the proposed acquisition "is warranted based on the significant financial and operation risks related to the transaction".
Cineworld has proposed a £1.7bn rights issue to raise cash for the takeover, which ISS also advised shareholders to dismiss.
"The transaction as a whole carries significant operational risk, as it relies on the implementation of [Cineworld's] successful European strategy in the US market, which exhibits different dynamics, by a management team that lacks US-market experience," ISS wrote.
It also condemned the "substantial financial leverage resulting from the transaction", as Cineworld would also need to take on debt to fund the deal as well as the newly issued equity. The enlarged group, if the deal went ahead, would be levered by around four times its 2017 earnings.
The UK cinema chain's largest 28 per cent shareholder, Polish entertainment business holding company Global City Holdings, supports the deal and said it would fully underwrite the rights issue.
But Cineworld's shares have slumped since the deal was announced, and shareholder Jupiter Asset Management has also condemned the deal – fund manager Alastair Gunn said he had bargained on getting a business which was "growing nicely in the UK and Europe" when he invested.
Pirc, another shareholder representative, has meanwhile backed the deal. Analysts also showed some support for the move to the US.
"To strike now, when AMC (the US Number One and biggest global cinema operator) is suffering so much, is a brilliant move by Cineworld, in our view, as it reverses the tables and would push it into the challenger position in the world's largest cinema market,” said Canaccord Genuity's Nigel Parson when the deal was announced.
Shareholders are due to vote on the deal on 2 February.