AMC’s New Shares Spark Controversy

Key takeaways

• AMC plans to issue a special one-time “dividend” to investors in the form of preferred shares
• The company has also applied to list its new preferred stock under the NYSE ticker “APE”
• While the new class of shares carries the same rights as existing common shares, it gives the company a workaround to release new equity
• AMC stock initially dropped on the announcement before climbing in recent sessions

AMC Entertainment Holdings, Inc., has had an interesting few years. In 2020, the pandemic cut the world’s largest theater chain to its knees when Covid lockdowns gutted its patronage. Then the meme stock craze hit, and AMC (alongside other meme giants like GME) saw its shares soar – and promptly crater when the rush ended.

But now, AMC stock is trending again for…slightly different reasons.

On Thursday, AMC’s CEO Adam Aron released a statement alongside the company’s Q2 2022 financial results. The statement’s purpose can be summed up in two lines:

“Today we are rewarding and recognizing our passionate and supportive shareholders, both to our shareholders in the U.S. and internationally. Shareholders will receive one AMC Preferred Equity unit for each company issued share of AMC common stock that they own.”

Wait…what?

Let’s go back to the beginning

In 2020, Covid lockdowns hit service sectors particularly hard as lockdowns forced businesses to shutter up. As its movie theaters emptied, AMC’s revenue collapsed so hard the company found itself on the edge of bankruptcy practically overnight.

The company was partially saved by a group of meme stock-era retail investors who called themselves “apes.” They gathered on message boards, social media and YouTube to pump up the stock. But when meme stocks collapsed, unlike many other investors, the apes stuck around.

So, what’s that have to do with AMC’s new preferred shares?

As it turns out, quite a lot.

Like many of its peers, AMC saw opportunity in the meme craze. The company took a leap of faith and issued tons of new stock, raising billions and clawing back from the brink of bankruptcy.

The gambit was so successful that the firm actually ran out of stock. So, AMC ran to its faithful investors to appeal for permission to issue more. But investors, fearing equity dilution, rejected the proposal.

That’s where AMC’s new preferred shares – named APEs in honor of the firm’s small-investor base – come in.

AMC stock, meet APE stock

AMC’s APE shares maneuver provides a clever workaround to the problem of raising its share count.

True, last year, investors denied the company the chance to issue more common stock. But way back in 2013 – before Adam Aron was CEO – AMC’s investors authorized the firm to issue preferred stock. While those shares never materialized, the authorization lives on.

And now, the company plans to capitalize on them.

On Thursday, AMC stated plans to issue a special, one-time dividend to all common shareholders. But instead of cash, each investor will receive one share of preferred stock for every share of common stock they own.

The initial dividend release will only total about 517 million APE shares – one for each share of AMC stock currently in circulation. But after the new preferred stock starts trading on the NYSE on 22 August, AMC has another 4.5 billion new units potentially waiting in the wings.

AMC also plans to let its stockholders vote to permit APE shareholders to convert their shares to AMC common stock. But even if this proposal strikes out, the unprecedented – and controversial – move frees up AMC to revive its balance sheets.

Said CEO Adam Aron in a letter to shareholders: “With the creation of APEs, AMC is deeply and fundamentally strengthening our company. Given the flexibility that APEs will give us, we will likely be able to raise money if we need or so choose, which immensely lessens any survival risk as we continue to work our way through this pandemic to recovery and transformation.”

AMC’s financials reflect its need for equity fundraising

AMC also released its Q2 2022 earnings report on Thursday – and the numbers leave something to be desired.

While total revenues grew to nearly $1.17 billion – over doubling its year-over-year results – AMC still counted a net loss of $121.6 million. That amounts to a 20 cent-per-share loss, though still better than the 24 cent loss expected.

Still, the company’s growth provides some encouragement. For instance, ticket sales more than doubled compared to last year, guiding revenue in the right direction. AMC also instituted price hikes to generate more cash and plug some of its leaks.

And though AMC’s debt and lease obligations remain high, AMC hopes to use funds raised from its upcoming stock issuance to pay down some $10 billion. If there’s enough leftover, AMC may turn its sights toward purchasing up other theater chains.

What AMC’s stock news means for investors

So far, reactions to AMC’s “2-for-1 stock split,” as CEO Adam Aron encouraged investors to think of it, have been mixed.

Despite Aron’s assurances that there is “NO DILUTION” due to the initial issue going to current shareholders for free, that could easily change once APE shares hit the NYSE. And though there’s technically no dilution if APE and AMC stock remain separate, if shareholders vote to permit APEs to convert, that could change, too.

On Thursday, the announcement saw AMC stock plunge nearly 11% in extended trading. But by Friday, many apes went ape, touting their “win” on social media and buying up new shares of AMC. As a result, AMC soared 19% Friday and another 8% on Monday. (Though the stock remains down 9.7% YTD and over 29% in the last year.)

Analyst reactions were also mixed. Some believe that the new APE shares provide an attractive path out of debt for AMC. Others have expressed concerns that the new shares could lead to potential dilution issues for existing investors.

But to sweeten the pot, this former meme stock is hopping on another popular 2021 bandwagon: NFTs. All 765,000 members of the AMC Investor Connect program will receive a free “I OWN APE” NFT as part of the company’s push toward investor goodwill – and additional capital.

AMC stock and you: don’t let the meme craze get you (again)

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