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How Silver Lake Exited AMC Above the Top

By Evan Niu, CFA - Feb 5, 2021 at 10:00AM

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The Reddit-fueled rally allowed the private equity firm to cash out before AMC's business recovered.

It's been quite a couple of weeks for AMC Entertainment Holdings (AMC 2.95%) following extreme volatility driven by retail traders. Many heavily shorted stocks recently skyrocketed into the stratosphere. Much of the activity was attributed to Reddit's WallStreetBets forum, which is now coping with the aftermath. The trade has mostly unraveled now, and market conditions appear to have calmed down. However, it wasn't all for naught, as AMC was able to benefit fundamentally from the chaos.

Still, while AMC capitalized on the rally by selling stock to raise capital, its timing was quite poor. AMC sold 63.3 million shares through an at-the-market (ATM) offering at an average price of approximately $4.82. As soon as AMC completed the program, shares immediately soared to a 52-week high of $20.36. Ouch. In contrast, private equity firm Silver Lake timed its exit perfectly.

A kid watching a movie in a theater with a mask on

Image source: Getty Images.

A trip down memory lane

Back in 2018, well before the COVID-19 pandemic wrecked the theater industry, Silver Lake invested $600 million in AMC through a convertible bond offering. Convertible bonds offer some downside protection since they're inherently debt, while also providing some potential upside if the underlying stock rises.

While there are plenty of institutional investors that utilize convertible arbitrage strategies -- going long the convertible bond while shorting the underlying stock -- Silver Lake didn't do that. The investment was a long-term play on AMC's ability to innovate on the technological front. This was back when MoviePass was a thing, and AMC had just launched its competing Stubs A-List program.

"AMC's category-leading investment in enhanced customer experience, geographic expansion, as well as innovation around the customer engagement model – including the highly successful recent launch of the AMC Stubs A-List program – has set the company up for long-term success," Silver Lake Managing Director Lee Wittlinger said at the time. "We look forward to helping AMC continue to leverage technology to serve its moviegoers and studio partners around the world."

Selling before the open

Silver Lake decided to take advantage of the recent spike in AMC shares, converting all that paper into stock and then unloading the shares. The private equity firm recently disclosed that it dumped its entire AMC position at prices ranging from $13.55 to $24.14 on Jan. 27, when the stock experienced massive volatility and hit the aforementioned 52-week high.

You might notice that Silver Lake's highest sale exceeds the listed 52-week high and wonder how the investor was able to sell at such favorable prices. The answer is that those trades occurred in extended hours, as the stock had jumped above $25 in pre-market trading that morning. Trades that take place in extended hours don't factor into the official trading ranges recorded in most financial databases. That's why AMC's 52-week high is still displayed as $20.36.

Many investors dream of getting out of positions at the top. Getting out above the top? That takes some rather fortuitous timing. After selling its stake for $713 million, Silver Lake was able to come out with a profit of $113 million without having to wait for AMC's actual business to recover. The good news for AMC is that the bond conversion effectively extinguished the debt, so the consumer discretionary company can't really complain all that much either, even if it's envious about the timing.

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