Meme stock investors have a new 800-pound gorilla in the room. Units of AMC Preferred Equity (APE) began trading on Monday, essentially a stock dividend on behalf of the country's leading multiplex operator.
There's been no shortage of confusion in reporting the move by AMC Entertainment Holdings (AMC 2.67%), as many media outlets initially reported that AMC shares were plummeting on Monday morning. It took time before those headlines were corrected to report what was a somewhat unconventional stock split. The new math -- adding the share price of both stocks -- still showed an overall decline on Monday, but it certainly wasn't the free fall that was first reported.
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Planet of the APEs
Every stockholder of AMC Entertainment should have received a share of the new preferred equity units for every share of AMC Entertainment they already owned. AMC Preferred Equity (the name behind the clever APE acronym) has the same economic and voting rights as the popular common shares.
There were hiccups and trading halts on Monday, and the only real shocker was the wide disparity in price for what was initially billed as a 2-for-1 stock dividend. AMC Entertainment had closed at $18.20 on Friday heading into this week. The preferred units opened at $6.95, spending most of its first two trading days in the high single digits. The original common stock stayed largely in the low double digits.
The math roughly adds up comparing the combined close over the past three trading days, showing a notable drop during a down day for the market on Monday, followed by a slight recovery on Tuesday as the gap narrowed between the two classes.
- 8/19/22-AMC $18.20
- 8/22/22-AMC $10.46 + APE $6 = $16.46
- 8/23/22-AMC $9.56 + APE $7.02 = $16.58
Why would a stock with a relatively low share price -- and already more than 500 million shares outstanding -- spin off a new class of stock as a dividend? There are two good reasons for this, depending on where you stand.
For AMC itself, it's a new way to raise money. Shareholders have been sensitive about dilution after AMC's share count increased nearly fivefold during the pandemic, even taking a stand against executive compensation this summer. The 516.8 million shares of AMC Preferred Equity that were distributed this week match the share count of the common, but the board has authorized that as many as 1 billion units can be issued. It will give AMC a new way to raise capital.
For retail investors, the advantage of the new preferred units is that the move should have smoked out any synthetic or fake shares out in the wild. There's no shortage of conspiracy theories among the meme-stock fan base suggesting that AMC is being manipulated by dark pools and illegal short positions. Despite CEO Adam Aron tweeting on a couple of occasions that the company has seen no evidence of the synthetic shares, this week's distribution was seen as a roll call.
Where does did leave us now? The gap is still wide between the two flavors of AMC. Jim Chanos of Kynikos Associates was on CNBC on Tuesday, arguing that shorting AMC and going long with an equal amount of AMC Preferred Equity units was a sensible trade given the 30% discount at the time. We'll also see analysts adjust their price targets on AMC, not because of a change in fundamentals but to account for the new normal. When the bearish Michael Pachter at Wedbush slashed his price target on AMC from $4 to $2 on Monday, he wasn't being more negative on the common stock. He was just adjusting for the stock split.
The two classes of stock don't need to converge. They might have the same economic value and voting rights, but investors of the lower-priced preferred units can't just swap them out for the common. The board would have to authorize a vote to increase the authorized share count for the common stock. There could very well be a larger voting base in the AMC Preferred Equity camp as the multiplex operator leans on the wider flexibility to raise capital that way, but a vote can't happen until the board makes it official.
In short, AMC Entertainment on its own was already the most entertaining of movie theater stocks. It will be even more interesting now that APE has been uncaged.
