Shareholders of AMC Entertainment Holdings (AMC 8.22%) saw the price of their common stock slump to the tune of 40% on Monday, but they were awarded one share of newly minted AMC Preferred Equity Units (APE) for each share of common AMC stock they owned, more or less offsetting their setback. All told, investors ended the day with about the same value they began with.
However, there's more to the story. The dilution linked to the deal is backloaded and follows a surge of dilution many AMC shareholders may not even realize took place during the heart of the COVID-19 pandemic.
The rest of the story
Movie theater chain AMC issued 516.8 million shares of newly created preferred stock on Monday. Since the owners of the 516.8 million shares of outstanding common stock were the recipients of these new preferred shares, existing shareholders have no less voting power now, and no less of a legal claim to the company's assets.
The catch? AMC's board of directors actually authorized the creation of one billion of these new preferred equity units. The remaining 483.2 million preferred shares will be reflected on the company's balance sheet. Notably, they can be sold at any point in the future provided AMC follows the proper filing procedure and disclosures with the Securities and Exchange Commission.
There's the prospective dilution to existing owners of this meme stock, by the way. Each preferred equity unit offers the same voting authority as a common share, so there's now more than a third of shareholders' total potential voting power sitting on AMC's books, waiting to be sold at some point in the future to the highest bidder. It's also a little more than dilutive in the sense that these newly issued preferred shares are prioritized before common stockholders (though after bond owners) in the event of a bankruptcy liquidation. If things reach that grim point, however, it's likely both the common and the preferred stock would lose nearly all of their value -- bondholders always come first.
A source of short-term cash
And make no mistake -- the company will almost assuredly sell these remaining 483.2 million preferred equity units sooner or later, and probably sooner.
The official notification didn't say as much. The written notice and explanation to existing shareholders only says, "AMC Preferred Equity units provide AMC with a currency that can be used in the future to further strengthen our balance sheet, including by reducing our debt and other liabilities."
Unofficially though, it looks far more likely than not that such a sale is already being lined up. CEO Adam Aron tweeted earlier this month when the company first began moving to create this new category of stock, "This new AMC Preferred Equity makes it possible for AMC to raise equity, reduce debt, seek M&A." It can only do any of those things if the company sells these newly created shares.
Aron's certainly no stranger to such fiscal maneuvers. The number of outstanding common shares grew from around 104 million before the COVID-19 pandemic took hold in the United States in early 2020 to the aforementioned 516.8 million shares of common stock by the first quarter of this year. Most of the proceeds from those sales went toward simply keeping the theater chain afloat during a challenging time. Not all of them, though. In March, AMC invested $28 million in gold-mining outfit Hycroft Mining. The company has also scooped up a few new theaters over the course of the past several months.
Notably, AMC hasn't made a significant dent in its long-term debt load despite the resumption of normal operations this year. That burden still stands at just under $5.4 billion, down slightly from a little over $5.4 billion as of the end of last year.
Net negative
If you haven't already, you'll be hearing a great deal of spin on these new preferred equity units. Some of it will be critical, pointing to the fact that the board effectively found a way of issuing stock after shareholders ultimately rejected the idea of creating more common shares at June's shareholder meeting. At the other end of the spectrum, some shareholders will be cheering the fact Aron once again has plenty of liquidity to do with as he sees fit. The upside (or downside) is somewhere in the middle of those two views.
The important reality is this: There are 483.2 million preferred equity shares waiting in the wings that will eventually dilute a little over one billion shares of outstanding common stock, or what may as well be common stock. That's a clear disadvantage to current and future shareholders.
