AMC Stock Falls After CEO Warns Company Could Be Forced to Sell More ‘APEs’

Text size

AMC Entertainment

stock closed down sharply Wednesday in the wake of comments from the CEO that the firm may be forced to sell more stock for less money if shareholders don’t approve measures that allow it to issue additional common shares.

During the company’s fourth-quarter earnings call Tuesday evening,

AMC

CEO Adam Aron urged shareholders to vote yes on an initiative that would increase the amount of authorized AMC common shares (ticker: AMC) and convert AMC Preferred Equity units (APE) into common shares. The measures would eliminate a price gap between AMC common shares and APE units, and allow AMC to sell common shares instead of just APE units.

Aron warned Tuesday that if the shareholder vote fell short—and APE units continue to trade at a discount—the firm could be forced into more dilutive offerings.

“We wouldn’t be blocked from raising capital, but we’d be raising capital on much less attractive terms,” Aron said. “It would cost more dilution to the stock that is entirely 100% preventable if a majority of our shareholders vote yes.”

AMC common shares fell 7.6% on Wednesday to $6.57. The APE units fell 9% to $1.87.

“I think that’s the contentious point—that AMC will have to continue to sell APE shares at a discount, thereby causing even more dilution than if the vote passes,” Wedbush analyst Alicia Reese told Barron’s. “There will be continued dilution either way, to keep AMC afloat as it continues to pay down its debt.”

Facing pandemic lockdowns, the firm stayed afloat by selling stock after January 2021’s meme stock surge propelled the theater chain into the center of a social media investing movement. But AMC’s ability to issue stock eventually hit a wall. AMC pulled a proposal to increase the amount of shares it could issue in 2021, citing a mixed reaction from its shareholder base.

The company instead issued AMC Preferred Equity units in August to each AMC common shareholder. Each unit represents one-hundredth of a preferred share—which has 100 times the voting power of a common share—meaning each unit has the same voting rights as a common share.

AMC was able to issue the APE units because it needed shareholder approval to issue more common stock, but not preferred stock. After providing each shareholder with an APE unit, it was free to sell more APE units. The units have traded at a steep discount to common shares, meaning AMC will need to sell more of them to raise cash.

The APE units are a subject of a shareholder lawsuit, where plaintiffs allege its preferred shares to common shareholders and subsequent APE stock sales cut the voting power of common shareholders, who may have been opposed to issuing more stock. AMC will be able to hold the vote, but must wait to execute the measures until a judge rules on the matter. A hearing is set for April 27.

Aron acknowledged the litigation during the call, describing it as “misguided.”

“We believe such litigation is without merit, that our actions have been totally lawful and consistent with our charter, and we will vigorously defend our position in this matter,” Aron said.

The company is also asking shareholders to approve a 10-for-1 reverse stock split, but that’s on the condition that it would only go through if the APE vote goes through.

For the fourth quarter, the firm reported a slimmer-than-expected loss. Reese notes the firm generated cash, and thinks it can do so for full-year 2023, “if industry box office holds up to current expectations.”

“It won’t be much cash generation yet, but something,” she said. “AMC should be fine—there will just be a lot of dilution coming if the vote doesn’t pass.”

Write to Connor Smith at connor.smith@barrons.com