AMC Entertainment Holdings, Inc. (AMC) has been making headlines in the financial world for weeks, and it’s not just because of the Reddit army this time.
The iconic movie theater company has embarked on a complex journey to improve its financial health, aiming to reduce its interest expenses and avoid bankruptcy.
Two major components of this restructuring plan are a 1-for-10 reverse stock split and the conversion of preferred equity (known as APE) into common stock.
In this blog post, we’ll dive into the details of these maneuvers and explore their potential impact on AMC’s future.
Understanding the 1-for-10 Reverse Stock Split
On August 24, AMC executed a 1-for-10 reverse stock split. Contrary to common belief, this transaction doesn’t change the overall value of the company or the value of individual shareholders’ positions.
Instead, it redistributes the company’s value across a different number of shares.
In a stock split, the share count increases while the share price decreases. For example, a 2-for-1 split would double the number of shares and halve the share price, balancing out the value.
In the case of a reverse stock split, like AMC’s 1-for-10, the share count decreases, and the share price increases, effectively adding a zero to the stock price. However, this hasn’t necessarily translated into a tenfold increase in AMC’s stock price.
The APE Conversion: Preferred Equity into Common Stock
The APE conversion is an integral part of AMC’s strategy to raise equity capital and alleviate its debt burden. APE stands for AMC Preferred Equity, and it was initially introduced in 2022.
Unlike traditional preferred equity, APE shares did not have seniority over common equity in terms of dividends or bankruptcy payouts.
They carried the same voting and economic rights as AMC common shares and were convertible to AMC shares on a 1-to-1 basis.
APEs were created to provide a means for AMC to access capital without diluting its common shares.
The company issued 517 million APE shares in August 2022, distributing them for free to existing shareholders to rally support from its meme investor base.
AMC then raised $272 million by selling APE shares, with creditor Antara Capital, LP accepting 91 million APE units as payment for $100 million of AMC’s outstanding debt.
Despite not performing well as a stock, APEs successfully served their purpose for AMC. They allowed the company to raise funds and manage its debt obligations. Consequently, AMC decided to simplify its capital structure by converting APEs into AMC shares.
The Controversial Journey of Reverse Split and APE Conversion
AMC’s plans to execute the reverse stock split and APE conversion were announced in December 2022, requiring shareholder approval.
The shareholder vote, scheduled for March 2023, faced controversy when a pension fund shareholder filed a class action lawsuit alleging an unfair voting process.
The contentious issue revolved around the bundled vote, in which both common and preferred shareholders would have equal weight.
Since the number of preferred shares significantly outnumbered common shares, this favored the preferred shareholders, especially Antara Capital.
Here’s a timeline of the events that followed:
- February: Delaware Judge Morgan T. Zurn authorized the shareholder vote but prohibited the conversion.
- March: Shareholders approved the reverse stock split and preferred equity conversion.
- April: Settlement terms were reached between AMC and the plaintiffs, granting common shareholders one share of AMC for every 7.5 shares they owned.
- July: Judge Zurn rejected the settlement agreement, demanding removal of certain unenforceable sections that waived common shareholders’ rights.
- August: Judge Zurn approved the revised settlement agreement, paving the way for the APE conversion. AMC stock experienced significant fluctuations, dropping into the $2 range in the days before the split.
With the lawsuit resolved, AMC implemented the APE conversion on August 25, 2023. In line with the reverse split, each share of APE was converted into 0.1 shares of AMC.
Impact on AMC and APE Investors
Following the completion of the reverse split and APE conversion, the situation evolved as follows:
- The reverse split on August 24 reduced the share count for AMC shareholders, with those owning 100 shares before the split now having 10 shares.
- APE shares were converted into AMC shares on August 25, with shareholders owning 100 shares of APE trading them for 10 shares of AMC.
- Additionally, AMC issued nearly 7 million AMC shares for the settlement agreement, which were distributed to common shareholders at the end of August.
- Post-split, conversion, and settlement, AMC currently has approximately 158 million shares outstanding.
Investors’ main concern regarding these moves is the dilutive effect of the conversion. AMC effectively merged the previously existing 1 billion shares of APE into the AMC share count.
Although the reverse split muddles the outcome, increased share counts tend to reduce earnings per share (EPS) and dilute the ownership percentage represented by each share.
Further dilution awaits AMC shareholders, as the company announced its intention to sell 40 million more common shares on September 6. These proceeds will be used to repay debt and bolster AMC’s cash position, leading to a drop in AMC’s stock price.
Analysts’ Divergent Views
Analysts are divided on AMC’s future prospects. Optimistic analysts argue that AMC’s capital restructuring efforts have improved its fundamentals and set the stage for growth.
They also point to favorable industry conditions, highlighting the success of movies like Barbie and Oppenheimer at the summer box office.
AMC’s screening of Taylor Swift’s The Eras Tour documentary, which brought in record-breaking ticket sales, has also boosted their confidence.
Conversely, pessimistic analysts view AMC as a value trap, suggesting that there hasn’t been a fundamental improvement in the business.
Even before the pandemic, AMC struggled to generate profits, and recent capital moves may be too little, too late to rescue the company.
The ongoing strike by Hollywood writers and actors adds to the uncertainty, as it will disrupt content production and potentially affect movie ticket sales.
AMC’s Stock Forecast
Analysts have varying price targets for AMC:
- Eric World of B. Riley is optimistic, setting a price target of $45, assuming AMC can return to pre-pandemic profitability. This outlook is based on the belief that AMC can use the capital raised for expansion or acquisitions.
- Alicia Reese of Wedbush is moderately optimistic, upgrading AMC from underperform to neutral and setting a price target of $19.
- Credit Suisse, Roth Mkm, and Citigroup analysts are less optimistic. Credit Suisse lowered its price target to $8 from $8.38, while Roth Mkm and Citigroup reiterated sell ratings, with Citigroup lowering its price target to $1.55.
AMC’s Stock Split History
The reverse split in August marked a significant event for AMC, as it was the first official stock split in the company’s history.
However, it’s worth noting that the distribution of APE shares in 2022 essentially amounted to a 2-for-1 stock split.
Although the stocks had different tickers, they represented ownership in the same company and effectively doubled AMC’s share count, similar to a 2-for-1 stock split.
At the beginning of 2023, many analysts were predicting bankruptcy for AMC. The company’s aggressive financial restructuring moves seem to have temporarily postponed that outcome.
However, investors remain skeptical, and AMC’s stock has faced significant volatility.
The prevailing sentiment is that AMC’s transformation from a debt-ridden meme stock to a legitimate investment is uncertain.
If you are considering investing in AMC, it’s advisable to approach it conservatively, at least until there is more clarity regarding the long-term effects of the Hollywood strike and AMC’s growth strategy.
Potential acquisitions or expansion efforts could significantly alter the company’s outlook, making AMC a risky proposition without more information.
In the ever-changing landscape of the entertainment industry, only time will tell whether AMC can reclaim its former glory or faces further challenges on its path to recovery.