A court ruling is instrumental for
AMC Entertainment Holdings
to continue securing new financing, but you’d never guess as such from the stock market’s reaction.
AMC stock (ticker: AMC) was down 34% on Monday as investors reacted to a late-Friday court ruling that would allow the movie-theater chain to convert its preferred equity units, known as APEs, to common shares.
APE units,
by comparison, jumped 16%.
That puts AMC shares on track for their biggest drop by percentage points in more than two years, according to Dow Jones Market Data. Back on Feb. 2, 2021, shares fell 41%. AMC stock touched $3.18 during this morning’s trading, which would be its lowest level since Jan. 26, 2021, when it finished at $3.05.
While AMC shareholders voted months ago to increase the amount of authorized stock, convert APE units to common shares, and execute a reverse stock split, the move was halted after some shareholders sued the company. AMC settled with the investors but required final approval from a Delaware court, which initially rejected the settlement in July but on Friday waved through a revised version that gives more shares to individual investors.
AMC spiraled into debt during the Covid-19 pandemic as lockdowns kept move theaters shuttered, with the subsequent recovery being slow. The company was arguably able to escape bankruptcy with the help of retail investors, who bid up AMC stock alongside the likes of
GameStop
(GME) during the “meme stock” trading frenzy in early 2021. AMC capitalized on newfound interest in the company to issue more shares, but eventually hit its issuance ceiling, which it was able to circumvent by issuing APE units.
When AMC asked shareholders to approve lifting the issuance ceiling and convert APE to common stock, CEO Adam Aron called it “crucial for our future.” AMC remains indebted and selling APE units has allowed it to pay down some of that debt pile. No doubt, the court ruling is key for AMC to continue to raise new financing.
So why is AMC stock down and APE up so much? It has to do with dilution, which occurs when more shares are issued and thus “diluting” the value of existing stock, which is a share in the total value of the company. APEs converted to common stock will dilute the value of existing AMC shares, which could be further diluted if the company continues to issue more common stock. APE stock, conversely, has risen to narrow the discount with the common stock to nearer par amid anticipation of the conversion.
That explains why a court ruling that could shape AMC’s future for the better is causing such immediate pain in the stock price.
Write to Jack Denton at [email protected]
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