Movie theater chain Cineworld could be a major M&A target after a 70-year-old law from the golden age of Hollywood was lifted

• Cineworld stock jumped nearly 50% in a week, directly following the decision to dissolve "Golden Age" Paramount Decree.
• The decree was put in place in 1948 to stop film studios from buying their own theatres and prevent monopolization.
• Now, private film studios in the US could be on course to buy up Cineworld's 500+ US branches.

Movie theater group Cineworld may find that it pulls in possible buyers for its business, rather than movie-goers, thanks to the lifting of a 70-year US law that prevented the major studios from owning their own screens.

The UK-owned company, which is the world's second-largest movie theater chain and owns over 500 sites in the US, saw its shares rocket up by nearly 50% last week on the London Stock Exchange after a federal judge said earlier this month the US Department of Justice can overturn the so-called "Paramount Decree."

The decree, which came into effect in 1948, was designed to prevent major studios at the time — Paramount, Warner Bros, Metro-Goldwyn-Mayer, 20th Century Fox, and RKO Radio Theaters, as well as Universal, Columbia and United Artists — from monopolizing the entire industry.

At the time, studios made and distributed their movies, and the law stopped them from owning the theaters where they would show. Back then, whenever a studio sold a movie to an independently run theater, it could do so in "blocks".

In order to show a potential blockbuster movie, the theater also had to agree to show a number of lower-quality, lower-earning shows from the same studio as well.

Read More: Joe Biden officially accepts the Democratic nomination this week. RBC says buy these 47 stocks spanning every industry that are poised to crush the market if he wins in a wave election.

Cineworld, which last year reported revenues of $4.4 billion, suffered just as much as the rest of the entertainment industry from the COVID-19 pandemic, with the temporary closure of all 787 of its theaters.

"Since the district court entered the Paramount Decrees, the motion picture industry has undergone considerable change," the DOJ said when it began its review of the decree a few months ago.

"None of the Paramount defendants own a significant number of movie theatres. Additionally, unlike seventy years ago, most metropolitan areas today have more than one movie theatre," it added.

With the decree now a thing of the past, traders have suggested Cineworld could well become a takeover target for any of the large Hollywood studios, which in turn pushed its shares above £0.60 pence ($0.80) from closer to £0.30 ($0.40) at the start of the week.

As of Monday, shares were at £0.47 ($0.62), having pulled back from last week's highs.

Read More: 'We are going to pay the price': Famed investor Jim Rogers sounds the alarm on central bank money-printing and exorbitant debt — and warns the next market meltdown will be 'the worst in my lifetime'

"It's already costing Cineworld almost $50m a month in spite of furloughing its staff," Michael Hewson, chief strategist at stockbroker CMC Markets, wrote in an note.

"The fear is that any further delays in film studio releases, along with social distancing and PPE requirements, could see the cinema business start to run out of cash very quickly if consumers show little enthusiasm for returning," he said.

With the advent of streaming and video on demand from the likes of Netflix, Amazon and Disney+, the movie industry, and the way consumers watch movies, has changed forever.

In Cineworld's case, it may find a big studio sweeps in to buy up its entire business, or even just its US theaters, numerous analysts have speculated.

The company derives 75% of its revenues from the US market, thanks to its acquisition of rival Regal in 2018, and has more screens in the US than anywhere else in the world, according to its website.

The restrictions on block-booking for example will remain in place for a further two years, by which time, technology, movie-goers' habits and the entertainment business itself may have completely changed.

"The current situation has been described by at least one studio executive to be a "chicken and the egg" situation, where movie studios don't want to release movies into theatres when only a handful are open — yet theatres don't want to open without new, fresh, blockbuster content," analysts at Goldman Sachs said in a note on August 5.

Read More: A Wall Street investment chief says the relentless surge in big tech stocks is headed for an abrupt ending — and warns it could sink the entire market by 40%