Back in August 29 2022, AMC Entertainment Holdings, Inc. (NYSE:AMC) launched a preferred equity unit (APE) as a special dividend to AMC shareholders. This APE preferred equity unit is economically more or less the samethingas a share. However, AMC couldn't issue any more shares at the time and resorted to this preferred that's the same in all but name.
It would have made the most sense if AMC had halved on that day and both AMC and APE traded at 1/2 the previous day's AMC value. But that's not what happened. Instead, AMC holders continued selling AMC but dumped APE.
This led to a bizarre valuation discrepancy between the two securities that are otherwise very similar.
This morning, AMC dropped a bomb as it raised a lot of capital by issuing a monstrous amount ofAPE units:
- Raises $110 million of new equity capital through the sale of APE units to Antara Capital, LP (“Antara”) at a weighted average price of $0.660 per share. The APE closing price on the NYSE on December 21, 2022 was $0.685.
But the biggest news of all is that the company seeks a shareholder meeting to vote on the voluntary conversion of APE into AMC. Of course, any AMC holder would vote against but according to the last 8-K, there are 516,838,912 AMC shares outstanding. The company issued one APE for each AMC, but according to the December 19 8-K, it issued another 125.9 million AMC Preferred Equity Units through an at-the-market program AND it is issuing another ~250 million units (emphasis added by me):
The sale of APE units to Antara will be split into two tranches. The first tranche involves the immediate purchase by Antara of 60 million APE units under the Company’s at-the-market program (“ATM program”). The second tranche, for the purchase of approximately 106.6 million APE units, as well as the $100 million debt exchange(for 91 million APE units), are subject to the completion of the waiting period under Hart-Scott-Rodino (“HSR”).
If my calculations are correct after this transaction, there will be roughly 516 million AMC units outstanding and ~886 million APE's.
Excerpt of latest AMC 10-Q Balance sheet(AMC 10-Q)
If all units and shares get voted, the APE's have a ~63% to 37% advantage. Many hedge funds and professional investors hold APE and short AMC due to the valuation anomaly. Meanwhile, AMC is famous for its diamond-hand retail shareholder base. I would think it is more likely a higher percentage of the APEs get voted. The enthusiasm of many AMC holders has likely waned as the share price declined 83% year-to-date:
It will be tough for AMC holders to defend against this conversion. At the same time, it ultimately hurts AMC and APE holders if these securities are not convertible. The company keeps raising capital, issuing enormous numbers of APE units, while it could have raised similar amounts of capital by issuing much smaller numbers of AMC shares.
Pre-market, the APE shares jumped ~90% and AMC shares dropped over 20%. The AMC debt has traded up as bankruptcy becomes less likely after the capital raise and debt exchange. In addition, the conversion would lead to a situation where it becomes cheaper to raise equity capital which also helps solidify the debt.
Depending on where prices are as you are reading this, I think the long APE / short AMC trade makes more sense than ever. There is visibility into a catalyst to make them convertible. I already had this trade, but sized it very small because of the short-squeeze history with AMC. I already owned some AMC June 25' debt with a coupon of 5.75%. It trades at 37 cents on the dollar. I think the outlook for the debt improved the most. I also sold AMC (now combined AMC/APE called AMC1) puts when volatility was high in the past. I'm not quite sure how these are going to work out in this situation. I'm not adding to those.
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