AMC common stock rises 21% while APE shares fall 13%
Delaware court rules against the proposed settlement timeline
The spread between AMC Entertainment Holdings Inc.’s common-stock price and its preferred shares widened on Thursday, reversing its narrowing trend earlier this week.
AMC’s common stock rose 21%, while its preferred shares — listed under the ticker APE — fell 13%. That broadened the gap between the two shares to around $3.41, a jump from the $2.34 that it had closed at on Wednesday. AMC bonds also dropped.
Delaware’s Court of Chancery sent an unexpected blow to traders betting an expedited conversion between the two units after denying the movie theater operator’s motion to lift a status quo order, days after the company reached a settlement with retail investors over the stock conversion.
It is “a surprise to most investors,” said Cabot Henderson, who focuses on merger arbitrage and special situations at JonesTrading. “For now, I continue to think this will get done once the parties are able to schedule a settlement hearing.”
The ongoing court case has created uncertainty to risk arbitrage traders looking to capitalize on the spread. They have been betting that the price gap between the two share classes will vanish once the conversion goes through. A potential delay means those investors who have set up their trades through stocks and options would have to hold their wagers for longer — eating into any potential profits.
Still, some analysts remain positive. “We believe this merely represents a hurdle as opposed to a roadblock in completing the proposed conversion,” said B. Riley’s Eric Wold in a research note, adding that the court decision was “likely made more around the speed of the settlement vs. the merits of the terms.”
On Monday, AMC announced that it had reached an agreement with retail investors that, pending the court’s approval, would have enabled it to proceed with its plan for a one-for-one exchange of its preferred shares into its Class A common stock.
“The parties offer no good cause to lift the status quo order,” Delaware Chancery Court Vice Chancellor Morgan Zurn wrote in her Wednesday ruling. “Accordingly, the motion is denied.”
Zurn previously let AMC move forward with a shareholder vote on the stock conversion and related proposals, but she ordered the company not to implement any changes until after an April 27 court hearing. The APE conversion was approved March 14.
The judge tentatively stuck to that timeline, ruling that the conversion remains on hold until she formally signs off on the agreement. She didn’t directly address the deal’s merits, instead she stressed that class action settlements require court approval to protect the interests of outside parties such as investors not involved in the litigation.
