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Why AMC Entertainment's Stock Crashed This Morning

By Anders Bylund - Apr 13, 2020 at 12:54PM

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The movie theater chain is sliding closer and closer to bankruptcy filings due to the coronavirus crisis.

What happened

Shares of AMC Entertainment (AMC -0.94%) fell as much as 25% on Monday morning, climbing back to a milder 18% drop at noon EDT. Over the weekend, The New York Post wrote that the world's largest movie theater chain is looking into bankruptcy as a way out of the coronavirus conundrum.

So what

According to the Post, AMC is talking to longtime legal services partner Weil, Gotshal & Manges about a Chapter 11 bankruptcy filing. This is just the start of a potentially long process, but the newspaper's sources noted that nobody hires this high-dollar law firm on a whim.

"You don't hire [lead WG&M lawyer Ray Schrock] unless you are filing," the Post's source said. "You are not going to hire them at their hourly rate to have a beer with them."

In a completely empty move theater, the silver screen shows a close-up shot of a man in a surgical face mask.

Image source: Getty Images.

Now what

AMC is not collecting any meaningful revenue while its theaters are closed, but the company still faces substantial fixed costs. Its balance sheet was weak before the crisis started, and AMC will have trouble keeping the lights on when it's time to reopen the movie theaters.

A Chapter 11 bankruptcy would not necessarily wipe out AMC's market value, but these filings often trigger a massive sell-off and may lead to a harsher Chapter 7 filing later on. In a Chapter 7 bankruptcy, AMC's current shares would be completely worthless. If the company returns to the public market after that, it would be under a new ticker symbol representing a completely different stock.

The company hasn't gone that far yet, but the Chapter 11 talks are not a good sign. I wouldn't touch AMC's stock with a 10-gallon popcorn bucket.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
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