AMC Entertainment Holdings Inc.'s two classes of equity securities came closer to converging Monday after the movie-theater company disclosed details of the proposals shareholders will vote on at its next shareholder meeting.
AMC Preferred Equity Units, or "Apes," were up 21.35% Monday to trade at $2.33, while its common shares were down by 9.07% to trade at $5.01 after the company said that on March 14 it plans to hold votes on proposals to convert all outstanding Ape units into common shares, do a 10-for-1 reverse stock split and substantially increase the number of common shares it will be able to issue in the future.
The proposed transactions could provide a potential lifeline for AMC by giving the company more options to raise cash. AMC has been struggling with weak box-office results affecting the cinema industry, while its shares have sunk close to where they were trading before the company caught fire as a meme stock in early 2021.
Since AMC emerged as a fan favorite among individual investors, some of whom refer to themselves as "apes," the company tried twice to get shareholder approval to enable it to issue more common shares, but failed both times due to shareholders' concerns regarding dilution.
The company created the Ape units, each amounting to one-hundredth of a preferred share, as a workaround to this constraint. In August AMC gave one Ape unit for each common share as a special dividend, while launching a program to sell additional Ape units. In the coming shareholder meeting, each Ape unit and each common share will be entitled to exactly one vote.
The Ape units have always traded lower than the common shares, reflecting investor uncertainty about the new equity class. Certain traders have tried to take advantage of this discrepancy through an arbitrage in which they purchase the Ape units and short the common shares, expecting that the prices of the two securities will ultimately converge if the shareholders vote in favor of converting the Ape units into common shares in March.
For AMC, the primary benefit of the shareholder proposals, if passed, would be to allow it to issue more common shares in the future, giving it a new basket of 405 million common shares it could sell or use for other purposes. It would still also have roughly 4 billion Ape units it could sell.
"Given that Ape unit holders essentially control the vote at 64% of combined holdings and may not get another chance to extract value from those units, we expect the two proposals to pass and for this vote to open the door to a massive equity raising opportunity for the company in the coming years," said Eric Wold, an analyst at B. Riley Securities.
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