AMC Entertainment has embarked on a meme-friendly experiment to provide a token reward to its private investor base while creating a backdoor way to raise more money.
The theater chain’s new preferred stock class – called “APE” units – will begin trading on Monday after being distributed to shareholders as dividends last week. “APE” stands for AMC preferred equity.
The special dividend appears to be in line with CEO Adam Aron̵[ads1]7;s aggressive marketing efforts to appeal to the retail investors who call themselves “monkeys” and have flocked to AMC over the past year and a half.
In some ways, the new promotions are similar to the free popcorn perks and exclusive screenings that Aron has rolled out in recent months.
However, the APE units are a corporate financing tool at their core because the shares create a new way for the AMC to raise money. As its stock price soared in 2021, the beleaguered theater chain sold millions of common stock to stay afloat during the pandemic, but eventually ran out of allotment. The shareholders refused to approve further sales.
The first APE units were distributed for free, but the company’s filings say it has the right to sell more of the units in the future — without further shareholder approval. AMC said it is currently authorized to issue up to 1 billion APE units and that it distributed a little more than half of its total dividend.
Aron has made it known that the company can use the right to sell the rest to raise cash.
“We think APES should let AMC raise capital, pay 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 movie hits this year, and studios are signaling a pullback from streaming-only releases, the US box office remains well below its pre-pandemic levels. Rival Cineworld, which owns the Regal Cinemas chain, said on Monday it was considering filing for bankruptcy.
AMC raising additional cash through the APE units would not be a surprise on Wall Street.
“The creation of the APE Unit gives AMC an avenue to raise incremental capital in the stock market. … We suspect that AMC will take advantage of its current share price to lower its debt balance,” Citi analyst Jason Bazinet, who has a sell rating on the stock, said in a note to clients on Aug. 15.
While the impact on AMC’s bottom line of the APE units will not be clear for some time, there are details that investors in both the APE units and common stock should know now. Shares in AMC fell almost 37 percent on Monday. Here is an overview of how the dividend process works and what shareholders should know.
How the dividend works
The APE shares were distributed as a dividend on Friday. In some ways, the unusual move resembles a stock split, where investors receive additional shares in proportion to each share they previously owned. Each APE unit may in the future be converted into one common share of AMC, making this move a 2-for-1 split.
In theory, that should knock down the price of AMC’s stock.
“It’s actually a two-for-one stock split, and I expect that once it becomes effective, the price per share will drop about 50%. Just like what normally happens with 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 shares are of different classes. The new APE units trade under the ticker “APE,” while AMC common stock will continue to trade under the ticker “AMC.”
Once the APE units are distributed, they are no longer linked to the AMC shares and can be bought or sold separately.
A document from AMC about the offering says the APE dividend is not expected to be a taxable event for US investors. However, investors who own parts of the AMC may receive a small cash share in lieu of fractional APE units, which may be taxable. The document also said that some brokerages may take “several days” to transfer the APE units to individual accounts.
Because the APE units are preferred equity, there are different rights in a potential bankruptcy proceeding than the ordinary ordinary share.
In the securities filing describing the offer, AMC states that the APE units are above ordinary shares but below debt in the capital structure. This means that APE shareholders will be paid before ordinary shareholders in a potential bankruptcy.
Given AMC’s uncertain future, this discrepancy could cause the share prices of the APE units and AMC stock to diverge.
“It wouldn’t surprise me at all if the APE shares sell at a premium over AMC common stock… [because] in the event of bankruptcy, the preferred shareholders would have priority over the common shareholders, Ritter said.
Issuance of new shares raises concerns about dilution for existing shareholders. This is one of the reasons why AMC shareholders had rejected the company’s previous attempts to issue more ordinary shares.
If AMC were to sell additional preferred stock, existing shareholders would see their claims on the assets and potential profits of the struggling theater chain further diluted.
“AMC continues to have an upside-down capital structure that has seen a 400% increase in shares outstanding since the start of the pandemic along with its significant debt load of $5.4 billion,” MKM Partners analyst Eric Handler wrote in a note to clients in August . 5. “The creation of an APE class (Preferred Equity Units) once again provides AMCs with dry powder to issue new shares for investment purposes. … But the key question from here is whether future share issues will prove accretive or dilutive.”
Handler has a sell rating and a price target of just $1 per share on AMC.
Aron, for his part, has pushed back on dilution concerns, pointing out that the first APE dividend does not change the ownership position of existing shareholders. He has also argued that dilution would be worthwhile if it helps AMC raise needed cash.
“There is bad dilution and good dilution. If added liquidity from dilution is wasted, it is bad. But if managed wisely, it is good. In fact, for AMC in 2021, it was actually great for our shareholders,” Aron tweeted in August 6
The extra cash could be used to fund acquisitions of other theaters, pay down debt or even push into unrelated businesses, such as AMC’s 2021 purchase of a large stake in a gold mining company.
– CNBC’s Michael Bloom contributed reporting.