AMC Entertainment (AMC -3.25%) CEO Adam Aron said in light of how well his investment in gold and silver miner Hycroft Mining (HYMC -3.11%) was received by the market, he's going to use the war chest accumulated during the meme stock trading frenzy last year to engage in more merger and acquisition (M&A) activity.
He told Reuters, "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."
Hycroft Mining cost AMC $28 million for a 22% stake in the business, and with $1.8 billion in liquidity burning a hole on the cinema company's balance sheet, Aron has a lot of room to move to make dozens, even hundreds of new investments.
But that doesn't mean such deals would be good for AMC investors. Hijacking shareholder resources to engage in empire-building, as Aron suggests he wants to do, should give investors pause.
Image source: Getty Images.
Mining an opportunity
On paper at least, the Hycroft deal is already paying off for AMC. The miner's stock was purchased at $1.07 per share, and it just closed at $2.32 per share, a 117% gain. Not too shabby for two weeks' time.
Hycroft also raised an additional $28 million from precious metals investor Eric Sprott, who injected cash into the miner at the same time as AMC. The theater chain then sold $139 million worth of new stock into the market, giving it a total of $195 million to play with.
The miner had shut down operations in November, saying its business was unsustainable at then-current gold and silver prices, and it wanted to switch to building a mill to process gold and silver sulfide ore, though it's unsure of whether it's feasible to do at commercial scale.
Aron contends, however, the experience AMC gained in turning around from being a cash-strapped stock in deep financial trouble is a useful skill set that can be applied to similarly situated businesses.
"While the Hycroft investment is pretty far from home," Aron told Reuters, "it does rely on a core competency of our company to understand balance sheets, and raising cash, and solving liquidity problems."
The problem is, AMC is still a financially distressed business that has in no way assured itself of stability. His idea is similar to having a mountain of debt that you can't pay off but getting a new credit card in the mail and using it to spend even more.
Image source: Getty Images.
Heal thyself first
AMC ended 2021 with $5.4 billion in corporate borrowings, $4.6 billion in operating lease obligations, and a slew of other expenses that totaled up to $12.6 billion in total debt. It raised $1.8 billion by diluting the heck out of its shareholders' stock, inflating the share count fivefold in one year.
Yet full-year revenue of $2.5 billion is less than half of what it generated in 2019, while theater attendance of 59.7 million people is 35% below where it stood two years ago. Even granting that last year got off to a slow start as the country was still coming out of the lockdown phase of the pandemic, the movie industry is not on cruise control as Aron has suggested.
Attendance was already on a slow, steady decline well before the COVID-19 outbreak, peaking at 1.57 billion back in 2002 and trending lower until hitting 1.2 billion in 2019.
That will only be exacerbated this year because there are fewer movies scheduled for release. Though a number of studios have agreed to reinstate a window of exclusivity for theaters for many of their movies before releasing them to streaming services, Netflix, Disney, and other services are still a significant threat.
Image source: Getty Images.
Off on a tangent
I applauded Aron's willingness to think beyond just the big screen even as I scratched my head at some of his ideas. Potentially partnering with fellow meme stock GameStop to serve as a destination for gaming tournaments is a novel approach; so is selling theater popcorn in retail stores and developing non-fungible tokens (NFTs) for moviegoers, though that may be of more dubious value.
Even so, it was expected his decision to get involved in M&A would be centered on the industry he knows well and not outside his core competency with mining. Doing so is not a wise use of the money investors entrusted him with regardless of the seeming endorsement of his plans as reflected in the sharp rise in AMC's stock price.
But a stock rally, even if it's the "mother of all short squeezes," doesn't change the structural problems plaguing AMC Entertainment, and the movie theater stock's investors need to think about what comes after. A mishmash of financially distressed businesses strewn out across numerous industries is not a hopeful picture.
