Please ensure Javascript is enabled for purposes of website accessibility

How Silver Lake Exited AMC Above the Top

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$12.23 (2.95%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.