Shares of AMC Entertainment Holdings (AMC.N) spiked on Monday after a U.S. court stopped the theater chain’s stock conversion plan that might dilute investors’ holdings.
The court disapproved the proposed settlement by AMC in a case that alleged the company’s plans to convert preferred stock to common to circumvent the will of common stockholders who had opposed the issuing of new shares.
According to AMC, the company had been experiencing a negative cash outflow at a high rate and warned its investors that an inability to raise capital could force it into bankruptcy. It then suggested selling more shares to enable it to pay off some of its $5.1 billion debt.
“What may not be clear to AMC’s shareholders is that if the company is unable to convert APE shares, AMC will be forced to issue significantly more APE shares to cover its upcoming cash requirements,” they said. They have an Underperform rating on AMC with a price target of $2.
Shareholders challenged the planned conversion and argued that it diluted existing stockholders without compensation, which eventually led to a settlement.
CEO Adam Aron said on Sunday, said that AMC has filed a revised petition for the stock conversion plan addressing the Delaware court’s concerns, signifying that the volatility was not over yet.
“AMC must be in a position to raise equity capital. I repeat, to protect AMC’s shareholder value over the long term we MUST be able to raise equity capital”, Aron said. “That is especially the case now with the added uncertainty caused by the writers and actors’ strikes, which could delay the release of movies currently scheduled for 2024 and 2025”.
If AMC succeeds in its second attempt, Monday’s gains will vaporize.
AMC common or ordinary shares were the most traded U.S. stocks at 9:41 a.m. ET and was short. It surged 21% to $5.33, while its preferred shares, “APE”, fell 3.7% to $1.73. It even spiked to 70% at a point in pre-market trading Monday.
AMC reached an agreement to pay compensation to common stockholders. According to lawyers for the plaintiffs, the settlement was valued at more than $100 million.
But Judge Zurn said she couldn’t approve the settlement because the deal came at the expense of APE unit holders.
“Awarding more shares to common stockholders necessarily comes at the expense of preferred units; the settlement consideration harms preferred unit holders,” she said.
“Right now there’s a fantasy of full recovery in movie theaters and as a result, equity holders are happy they won’t be massively diluted by the conversion,” said Thomas Hayes, managing member of Great Hill Capital Llc in New York.
“Barbie” and “Oppenheimer” drew large crowds and were a win for theater chains globally, after slow ticket sales in June and July.
Analytics firm Ortex forecasts that a large part of Monday’s buy pressure to be generated by a short squeeze, due to about 28% of AMC’s publicly available shares under short position.
Ortex also expects bearish investors to take a $270 million paper loss.
