AMC Entertainment Holdings, the world’s largest movie theater chain, has received a green light from a Delaware court to convert its preferred equity units, known as APEs, into common stock. The ruling, which was announced on Friday, August 11, 2023, is a major victory for AMC and its APE holders, who stand to gain from the conversion and the potential new financing that AMC plans to raise.
What are APEs and why are they controversial?
APEs are a type of security that AMC created last year to circumvent a share limit that it could not lift without the support of its retail investors. APEs are convertible into common stock at a one-to-one ratio, but they also have voting rights and other privileges that common stockholders do not have. AMC issued APEs to raise cash and pay down some of its debt during the Covid-19 pandemic, which forced many of its theaters to close or operate at reduced capacity.
However, some of AMC’s shareholders challenged the legality of the APEs and sued the company in Delaware Chancery Court. They argued that the APEs diluted their ownership and gave undue influence to hedge funds and arbitrageurs who bought most of the APEs. They also claimed that AMC’s management misled them about the need for more authorized shares and the conversion plan.
How did the court rule and what does it mean for AMC and its investors?
The court ruled in favor of AMC and approved a revised settlement that includes extra shares for individual investors who own common stock. The settlement has been valued at as much as $120 million, depending on AMC’s volatile stock price. The court also waived some of the potential claims that the shareholders could have brought against AMC and its executives.
The ruling clears the way for AMC to convert its APEs into common stock and raise new financing by the middle of this month. AMC’s CEO Adam Aron has called the conversion plan “crucial for our future” as the company seeks to recover from the pandemic and compete with streaming services. The conversion will also reduce AMC’s debt burden and interest expenses.
The APE holders, who have been waiting for months to convert their units into common stock, are celebrating the ruling as well. They will receive one common share for each APE unit they own, plus a dividend of 0.5% per annum. They will also be able to sell their shares in the open market or hold them for potential appreciation. Some of the APE holders are hedge funds like Antara Capital LP, which owns about 30% of the APEs, while others are retail investors who support AMC as part of the “meme stock” phenomenon.
How did the market react to the news?
The market reaction to the news was mixed, as different classes of AMC’s securities moved in opposite directions. AMC’s class A shares, which are traded on the New York Stock Exchange, fell by 27% in premarket trading on Monday, August 14, 2023, as investors anticipated the dilution effect of the conversion. The APE units, which are traded on Nasdaq under the symbol AMCEU, surged by 29% in premarket trading on Monday, as they closed the gap with the common stock price.
The price difference between AMC’s class A shares and APE units has been fluctuating since the lawsuit was filed in May 2023. At one point, in July 2023, the class A shares soared by 100% in after-hours trading when a judge rejected an earlier version of the settlement, while the APE units plunged by 50%. The judge later approved a revised settlement that was more favorable to both parties.
The market volatility reflects the uncertainty and complexity of AMC’s situation, as well as the divergent interests and expectations of its various stakeholders. AMC’s class A shareholders include many retail investors who have rallied behind the company as a symbol of resistance against Wall Street and short sellers. They have also benefited from AMC’s efforts to engage with them through perks like free popcorn and exclusive screenings. AMC’s APE holders include some institutional investors who have taken advantage of the arbitrage opportunity between the two classes of securities. They have also supported AMC’s recapitalization plan and conversion proposal.
What are the challenges and opportunities ahead for AMC?
AMC still faces many challenges and opportunities ahead as it tries to survive and thrive in a changing entertainment industry. The company has reported losses for six consecutive quarters and has accumulated more than $5 billion in debt as of June 30, 2023. The company also faces competition from streaming services like Netflix and Disney+, which offer more content and convenience to consumers. The company also has to deal with changing consumer preferences and habits, as well as health and safety regulations related to Covid-19.
However, AMC also has some strengths and opportunities that could help it overcome its difficulties and achieve its goals. The company has a loyal and passionate fan base that has shown its support and enthusiasm for the movie theater experience. The company also has a strong and visionary leadership team that has been proactive and innovative in finding solutions and creating value for its stakeholders. The company also has access to a diverse and attractive slate of movies that could drive attendance and revenue in the coming months and years. Some of the upcoming titles include Dune, No Time to Die, Spider-Man: No Way Home, and Avatar 2.
AMC’s future will depend on how well it can balance its financial obligations, operational challenges, and strategic opportunities. The court ruling on the APE conversion is a significant step in that direction, but it is not the end of the story. AMC will have to continue to adapt and evolve to meet the needs and expectations of its customers, partners, and investors.
