AMC Apes Drunk On Liquidity

The last time we discussed AMC Theaters was two weeks ago when its stock fell despite earnings and revenue beating estimates. At the time, we noted that the overhang from an upcoming shareholder vote and concern about the company’s liquidity was keeping a lid on performance. ⚰️

Shares have declined further since then, so let’s discuss how it got here and what happened at today’s shareholder vote.

As we all know, the ‘meme stock’ craze of 2020 and 2021 bought AMC a lifeline by boosting its share price and allowing it to raise fresh capital. It did that several times before shareholders had enough of it. πŸ›‘

So, after shareholders pushed back on the company’s attempts to raise more funding through common stock sales in 2021, it had to find a workaround. In August 2022, it embraced its community’s ‘meme culture’ and decided to issue AMC preferred equity units under the ticker symbol $APE. It then went to shareholders and asked for approval to issue up to 1 billion APE units.

To help win approval from its investor base, the company said it would initially distribute more than 500 million APE units to existing investors through a special dividend. They would each receive one $APE unit for every share of $AMC common stock they owned. And while the company received no funds from that initial distribution, it was enough to win shareholder approval of the new structure, and ultimately it gave executives the financial flexibility they needed. πŸ‘

Unfortunately, once $APE shares began trading, that’s when the problems began. Although both $APE and $AMC shares gave holders the same claim to the economic value created by AMC’s underlying business and had the same number of outstanding shares, their share price was drastically different.

That created a massive arbitrage opportunity, where traders would buy $APE shares and short $AMC shares to capture the spread. That led to a slow and steady decline in both of them. And with both share classes falling significantly, the company became concerned that they could be delisted from the New York Stock Exchange (NYSE) and drastically reduce their investor base/ability to raise funds again. 😬

As a result, the company proposed the following actions to shareholders: πŸ“

  1. It would convert existing APE units into AMC common shares, eliminating the market’s arbitrage opportunity but further diluting AMC shares.
  2. Perform a 10:1 reverse split of AMC common shares, removing its NYSE delisting risk and providing the flexibility to raise more capital via stock in the future.Β 

And that’s what shareholders voted on today. Despite the dilution concerns, roughly 88% of the 978 million votes cast approved both measures. πŸ—³οΈ

However, there is still some uncertainty the company and its shareholders need to wrestle with until at least April 27th. A Delaware Chancery Court injunction hearing has prevented any new debt-raising action by the company until then. The hearing revolves around a class-action lawsuit that claims AMC circumvented shareholders who were against adding more shares by creating the APE preferred equity units.

Ultimately though, the market seems to believe this case will be settled, and the actions approved by shareholders are likely to move forward. That’s why $AMC shares fell 15% on the day, as the news likely means more dilution is ahead. 😟

As always, anything can happen, and we’ll have to see how this develops in the coming weeks. πŸ‘€

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