Shareholders of AMC Entertainment (NYSE:AMC) have to be smiling. After the stock fell by more than half in 2017, shares are on the rebound in 2018. The stock is up 36% on the back of a much stronger box office in the first eight months of the year.
Last week, the news got even better, as AMC closed a $600 million investment from private equity firm Silver Lake Partners. The transaction is positive for a few reasons, as AMC gets a vote of confidence from one of the most respected tech-focused private equity firms.
At the same time, the money let AMC buy back stock owned by Dalian Wanda Group, a Chinese real estate conglomerate. Wanda's ownership stake had caused AMC some headaches when Wanda came under fire from Chinese authorities last summer. That, combined with a strained U.S.-China trade relationship, means lowering Wanda's majority stake in AMC is likely another positive.
And by the way, the transaction will also shower cash -- and lots of it -- onto AMC shareholders via a $1.55-per-share special dividend.
Silver Lake's take
Silver Lake will not be buying AMC common stock, but rather $600 million of unsecured convertible notes, due in 2024. Convertible notes are debt instruments that bear low interest rates, but can be converted into common stock -- usually at a higher price and on a future date. In this case, Silver Lake's notes will bear an interest rate of 2.95%, and will be convertible to AMC Class A common shares at $20.50 per share after one year.
About $420 million from the notes has already gone toward buying 24 million of Dalian Wanda's Class B shares (which have higher voting rights than A shares) at $17.50 per share -- a 13% discount on AMC's stock on the date it was announced. Wanda now owns 51.8 million Class B shares, just over 50% of all shares outstanding. However, should Silver Lake convert all its notes into common shares, Wanda's ownership in AMC would be lowered to roughly 38% (though Wanda would still retain more voting rights).
Silver Lake will also get a seat on AMC's board, and AMC has pledged to select another independent director (e.g., not from Wanda) with significant tech expertise, per Silver Lake's approval.
Positives all around
The deal seems like a positive for everyone. Wanda got to sell a large chunk of its shares without having to chaotically sell into the market (which could have tanked the stock price) and AMC got to buy back shares at a discount to the market price.
However, I think the deal is especially good for AMC shareholders. First (and most obvious), AMC will be paying common shareholders a huge $1.55-per-share special dividend (around $160 million of the $600 million in notes will go to this). Based on AMC's closing price of $19.80 on the day the deal was announced, that's a huge 7.8% yield. And that's on top of AMC's current dividend yield, which is a not-too-shabby 4.15%. The special dividend will be paid on Sept. 28 to shareholders of record as of Sept. 25.
And while some may be concerned about piling more debt onto AMC's already hefty $4.82 billion debt load (including lease obligations), keep in mind that the interest rate on Silver Lake's debt is less than AMC's current dividend yield. So since the notes will be taking common stock out of the market, and the dividend won't be paid on those shares, AMC will actually have a lower cash burden until the notes are converted to stock. In addition, there should be leftover cash from the notes to go toward corporate purposes.
Beyond the numbers
More than the financial impact, this is qualitatively a great thing for AMC. A large part of the reason AMC's shares tanked last year was the fear that moviegoing was being disrupted by a variety of forces such as streaming video; premium video on demand (VOD), i.e., watching movies at home the same day they hit theaters; and the MoviePass option from Helios and Matheson Analytics.
To have Silver Lake, known for forward-thinking tech investments in companies such as Alibaba and Tesla, invest in AMC signals that the movie theater business might not be as much of a relic as the market thought last year.
AMC CEO Adam Aron said, "Their tech investing expertise dovetails perfectly with our expanding use of technology at AMC in the improvement of our guest experience at our theaters."
Can the rebound continue?
While AMC's stock has had a great run this year, it is still far below the heights it reached in early 2017. But with premium VOD all but dead, MoviePass hovering near collapse, and Silver Lake now helping AMC adapt the moviegoing experience to the modern world, I don't think it's out of the question for the stock to rise substantially from here.