We get it. AMC Entertainment (AMC 8.73%) constantly trying to dilute investors isn't what Reddit traders signed up for; they wanted short squeezes that stick it to hedge funds and short-sellers.
Sometimes, though, dilution can be beneficial and a company has to do what's necessary to save the business. But almost two weeks after CEO Adam Aron took to social media to explain why issuing another 25 million shares was good for shareholders, the theater chain operator announced it was shelving the proposal.
Image source: Getty Images.
One step back to go two forward
No doubt AMC is drunk on tapping the equity markets, trying to use the opportunity of its ridiculously elevated stock price to keep adding more money to its coffers. But it's with good reason -- AMC could really use some extra funds.
The theater chain operator ended the first quarter with $5.4 billion in long-term debt, $1.6 billion in short-term debt, and $4.9 billion in operating lease obligations, with almost $600 million in payments on them due this year.
At AMC's closing price of $52 a share last Friday, the 25 million shares it sought to issue could have raised over $1 billion for the theater chain. Yeah, it's not much to make a dent in the debt mountain AMC has, but it would have at least covered its leases this year.
Earlier this year, AMC sought investor approval for a massive 500 million share authorization, one that would have doubled its share count. While the dilution would have been equally massive, AMC was trading around $10 a share at the time, meaning it could have raised at least $5 billion.
Considering how its stock surged in the months since, it's quite possible AMC could have wiped all of its debt from its balance sheet. But Reddit traders thwarted that attempt too. In the end, the theater chain had to backtrack and settle for an offering of only 43 million shares.
Better for everyone
The r/WallStreetBets crowd should have taken a cue from GameStop (GME 0.39%), their original meme stock target that also found itself teetering on the edge of irrelevance, if not bankruptcy.
Because it was able to use the price of its own ridiculously overvalued stock to raise cash, the video game retailer is now debt-free and has plenty of cash in its war chest to take on the transformation and turnaround it so desperately needs.
Sure, the companies realize their stock prices are completely untethered to their business or industry fundamentals, and AMC even warned investors that "unless you are prepared to incur the risk of losing all or a substantial portion of your investment," you shouldn't buy the stock it was offering.
But dilution is sometimes a necessary evil. AMC could have found itself on a much firmer financial footing with the 25 million offering but most certainly would have stabilized its balance sheet with the larger 500 million share issuance.
Image source: Getty Images.
A formidable hurdle to surmount
Theaters remain an important part of our culture, as seeing a film on a television set, even if it's a 60-inch or 72-inch screen, cannot compare to the big screen experience.
Although the theater operator has thoroughly embraced its meme stock status by introducing some novel enhancements to being a shareholder, such as discounts at the concession stand, investors need to focus on AMC's fundamentals.
It still faces the problem of not enough people going to the movies, as even the Labor Day holiday weekend saw relatively few moviegoers in attendance. And it has the additional problem that movie studios are simultaneously introducing films to theaters and their own streaming services -- when they're not bypassing theaters altogether.
Theaters were already dealing with declining attendance that could only be partially mitigated by increasing ticket prices, which in turn causes even more people to stay away from the theater. As a result, the long-term outlook for theaters generally -- and a debt-addled AMC in particular, -- is not especially rosy.
Thanks for nothing
Investors rebuked Aron for attempting another cash grab, but they did so at their own peril and have endangered the entertainment stock's survival.
AMC may return with a much smaller proposal, just as this canceled offering was a large step down from the earlier 500-million stubs idea. Still, the penny-ante proceeds it might raise from such an offering won't really help the theater operator's precarious position.
Therefore, AMC finds itself in a difficult pickle today. Unfortunately, the stock traders who have consistently blocked AMC Entertainment's efforts to shore up its financials so they could instead one-up the short sellers for social media points have only themselves to blame.
