AMC Entertainment (AMC 8.23%) is about to embark on a bit of empire building given how CEO Adam Aron's decision to invest in an all-but-defunct gold and silver miner was received. He told Reuters that with a massive $1.8 billion "war chest" built up from diluting his shareholders during the meme-stock trading frenzy last year, he wants to now find other "transformational" deals like Hycroft Mining (HYMC -4.38%).
His loyal, small-investor fan base gobbled up the news, and AMC's shares are soaring over 40% higher heading into Monday's close. If the rally just so happens to launch the "mother of all short squeezes" AMC's self-professed apes have been looking for, all the better.
Image source: Getty Images.
It's always been part of the rallying cry in the internet's stock chat rooms that inflicting pain on hedge funds, short sellers, and other nefarious types working behind the scenes to hold the theater operator's stock down was needed.
In the two weeks since the gold mine investment was announced, AMC's shares have more than doubled in value and reversed what had previously been a months-long slog lower. The stock has now erased three straight months of losses.
Still, sober-minded investors should use caution.
A new type of conglomerate
Reuters quoted Aron as saying, "Transformational M&A is mandatory. Our shareholder base has given us capital to deploy with the clear expectation that we are...going to do exciting things with the money they entrusted to us."l
That money came from selling more stock into the market. At the end of 2020, AMC had 152.3 million shares outstanding; in its fourth-quarter earnings report released earlier this month, AMC now has 513.8 million shares outstanding. That's where Aron's "war chest" came from.
Presumably, the money entrusted to Aron and AMC was to fix AMC not engage in empire building. Arguably, deals like Hycroft Mining could turn out to be lucrative if they succeed, but numerous studies show that serial acquirers like AMC says it wants to be usually underperform over the long haul.
Mergers and acquisitions are always good -- until they're not. With all the yellow flags already surrounding AMC Entertainment, its plan to go on a spending spree with scarce shareholder resources, rather than pay down the movie theater's voluminous debt, should plant another one for investors.
