In its second day of trading, AMC Preferred Stock (NYSE:APE) popped as investors embraced the new dual class structure and seemed to migrate from the common stock to the preferred alternative.
As of 12:28 p.m. ET, APE stock was up 18.7% to $7.12, while shares of AMC Entertainment (AMC 3.16%) were down 5.1% to $9.93.
Yesterday, AMC Entertainment gave all shareholders an APE share for each share of AMC they own. Effectively, the company gave a stock dividend, but in the form of preferred stock, creating a new dual-class structure rather than just issuing more common stock.
AMC's preferred stock doesn't offer any benefits like dividends to shareholders, but instead gives the movie-theater operator a way of raising more cash by selling more preferred stock. Shareholders had previously blocked its ability to sell more common stock.
AMC's board has authorized it to issue 1 billion preferred shares, and the stock dividend made up 516.8 million shares, meaning management has 483.2 million preferred shares remaining that it could issue. At APE's current price, that would raise roughly $3.5 billion.
It's unclear if or when management plans to issue additional APE shares, but it seems likely to do so, as raising capital appears to be the only reason for creating the preferred stock class in the first place.
There's a good argument for APE shares to be worth more than AMC common stock. Preferred shareholders outrank common shareholders in a bankruptcy, meaning that if AMC were to liquidate, preferred stockholders would get paid first, after debt holders but before common stockholders. Given that discrepancy, I'd expect the prices of the two equity classes to move at least toward parity in the coming days.
AMC survived the pandemic, but its balance sheet is still a wreck. It lost $117 million in free cash flow in its most recent quarter, and it still has $5.4 billion in debt, which is costing it roughly $320 million in interest expense each year.
With its cash losses continuing even as the movie theater industry bounces back, it wouldn't be surprising to see the company try to stanch the bleeding by raising cash with new preferred shares.