AMC Entertainment launched a meme-friendly experiment to give its retail investor base a token reward while also creating a backdoor to raise more money later.
The theater chain’s new preferred share class — known as “APE” units — will trade on Monday after it was paid to shareholders as a dividend last week. “APE” stands for AMC Preferred Equity.
The special dividend seems consistent with CEO Adam Aron’s aggressive marketing efforts to appeal to the retail investors who call themselves “monkeys” and have flocked to AMC for the past year and a half.
In a way, the new shares are similar to the perks of free popcorn and exclusive screenings that Aron has rolled out in recent months.
However, the APE units are at heart a corporate financing vehicle, as the shares create a new way for AMC to raise money. As its stock price soared in 2021, the ailing theater chain sold millions of common shares to stay afloat during the pandemic, but eventually ran out of allotment. Shareholders declined to agree to additional sales.
The initial APE units were distributed free of charge, but the company’s filings say it has the right to sell additional units in the future — without additional shareholder approval. AMC said it is currently authorized to issue up to 1 billion APE units and will pay out just over half of that amount with the dividend.
Aron has announced that the company may exercise the right to sell the remainder to raise cash.
“We believe APES should let AMC raise capital, pay off debt and do more. Not good news for the doubters,” Aron said in a tweet.
And AMC, which reported more than $10 billion in debt and other long-term liabilities at the end of the second quarter, may need to raise cash.
While there have been some big hit movies this year and studios are signaling a move away from streaming-only releases, the US box office remains well below pre-pandemic levels. Rival Cineworld, which owns the Regal Cinemas chain, said Monday it was considering filing for bankruptcy.
AMC raising additional money through the APE units would come as no surprise on Wall Street.
“The formation of the APE entity provides AMC with a route to raise additional capital in the stock market. … We suspect AMC will use its current share price to reduce its debt,” said Citi analyst Jason Bazinet’s sell rating the stock, according to a customer announcement dated Aug. 15.
While the bottom line impact of the APE units will remain unclear for AMC for a while, there are details investors in both the APE units and the common stock should know now. Here’s an overview of how the dividend process works and what shareholders should know.
This is how the dividend works
The APE shares were distributed as a dividend on Friday. In a way, this unusual move is similar to a stock split, where investors get additional shares in proportion to each share they previously owned. Each APE unit can be converted into one common share of AMC in the future, making this move like a 2-for-1 split.
In theory, that should push AMC’s stock price lower.
“It’s effectively a two-for-one stock split and I would expect the price per share to fall about 50% once it takes effect. Just like what usually happens in a two-for-one stock split,” said Jay Ritter, the Cordell Professor of Finance at the University of Florida.
In this case, however, the two stocks are different classes. The new APE units will trade under the ticker “APE” while the AMC common stock will continue to trade under the ticker “AMC”.
AMC shares are down nearly 42% on Monday. The new APE units closed their first day of trading at $6 a share, erasing most of the losses in common stock. Adjusted for the price of APE on its first trade, AMC’s shares fell 5.5% on Monday.
Once distributed, the APE units are no longer tied to AMC stock and can be bought or sold separately.
A document from AMC on the offering states that the APE dividend is not expected to be a taxable event for US investors. However, investors holding fractional shares in AMC may receive a small cash portion in lieu of fractional APE units which could be taxable. The document also said some brokers could take “several days” to transfer APE units to individual accounts.
bankruptcy considerations
Since the APE shares are preferred shares, the rights in possible bankruptcy proceedings differ from those of the regular ordinary shares.
In securities documentation detailing the offering, AMC states that the APE units rank above common stock but below debt in the capital structure. This means that in the event of a possible bankruptcy, APE shareholders would be paid before common stock shareholders.
Given AMC’s uncertain future, this discrepancy could cause the stock prices of the APE entities and AMC stock to diverge.
“I wouldn’t be at all surprised if APE shares sold at a premium to AMC common shares… [because] in the event of insolvency, the preference shareholders would have priority over the ordinary shareholders,” said Ritter.
Possible dilution
The issuance of new shares raises dilution concerns for existing shareholders. It’s one of the reasons AMC shareholders rejected the company’s previous efforts to issue more common stock.
If AMC were to sell additional preferred shares, existing shareholders’ claims to the ailing theater chain’s assets and potential profits would be further diluted.
“AMC still has an upside-down capital structure, having seen a 400% increase in outstanding shares since the pandemic began, along with a sizeable 55.4 billion in debt. “Creating a Preferred Equity Units share class (APE) is again offering dry powder to AMC to issue new shares for investment purposes. … However, the key question from here is whether future stock offerings will prove to be value-added or dilutive. “
Handler has a sell rating and a price target of just $1 per share on AMC.
For his part, Aron has vigorously dismissed dilution concerns, noting that the initial APE dividend will not change the ownership position for existing shareholders. He’s also argued that a dilution would be worth it if it helps AMC raise the cash it needs.
“There is bad dilution and good dilution. When additional liquidity gained through dilution is wasted, it’s bad. However, if managed wisely, it is good 6.
The extra money could be used to fund acquisitions of other theaters, pay down debt, or even venture into independent deals, like AMC’s purchase of a large stake in a gold mining company in 2021.
— CNBC’s Michael Bloom contributed coverage.