(Updates with ISS quotes)
By Ben Martin
LONDON, Jan 24 (Reuters) - Cineworld's attempt to buy U.S. rival Regal Entertainment has been dealt a blow after advisory group Institutional Shareholder Services told investors to oppose the $3.6 billion deal because it posed "significant financial and operation risks."
London-listed Cineworld agreed to buy Regal last month through a reverse takeover funded with debt and a 1.7 billion-pound share sale that it launched last week. The acquisition will give the British company a base in the United States and transform it into the world's second-biggest cinema chain by number of screens, with more than 9,500.
But Cineworld's shares are down sharply since Reuters reported in November that the two businesses were in talks.Cineworld shareholders are due to vote on the deal and the rights issue at a meeting on Feb. 2 and ISS has recommended they oppose both the takeover and fundraising.
"Although the idea of trying the successful strategies pursued in Europe within the U.S. market may have some merit, the scale of the transaction relative to the current size of the company, along with management's lack of previous experience in that market, leave a significant challenge in terms of the implementation of this strategy," ISS told clients in a report.
"Moreover, the significant financial leverage would amplify any shortcomings in the execution of the strategy."
Other shareholder advisory firms, including PIRC, have recommended that investors back the takeover.
A spokesman for Cineworld declined to comment.
Richard Marwood, a fund manager at major Cineworld shareholder Royal London Asset Management, told Reuters last month that he was uncomfortable with the debt the UK cinema chain will take on to finance the acquisition. (Reporting by Ben Martin, editing by David Evans and Jane Merriman)
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