AMC Entertainment Holdings is a movie theater chain, but not like any other. The recent buzz around the stock and its so-called APE shares seems to be getting more attention than any films shown in the last few years.
AMC’s APE shares will be converted into common stock on Friday.
Meme stock AMC (ticker: AMC) will conclude a 10-for-1 reverse stock split on Thursday, and then its preferred equity units will convert to common stock on Friday. But what does this all mean and why has the stock tumbled in the days leading up to the big moves?
How We Got Here
AMC has garnered a lot of attention since the pandemic hit U.S. shores. The movie theater company had to shut down operations due to Covid-19 lockdowns after already taking on loads of debt to buy smaller movie chains and invest in upgrading its theaters. The road to survival was not an easy one, and the company had to sell stock to keep the lights on.
Luckily for AMC, it became a “meme stock,” or a stock that gets a massive amount of attention from retail traders who discuss their stock picks on social media threads and try to stick it to short sellers. With such a high short interest at the time, meme traders bought up shares, squeezing institutional investors who wanted to gain from the stock’s potential decline.
The stock got as high as $33.90 in June 2021, and AMC wanted to continue selling stock in order to raise more capital. But not all shareholders were on board and AMC didn’t have the votes, so the potential additional sales of AMC stock were squashed.
AMC needed a solution to gain more cash to pay off its debt while keeping investors happy. That’s where the APEs came in.
Explaining the APEs and the Conversion
AMC issued about 517 million preferred equity units, or APEs, to be traded on the New York Stock Exchange in August 2022 with the intention of raising more money to pay off debt. In order to keep legacy AMC holders content, each shareholder gained one share of preferred equity units for each AMC share they owned.
After a year, the APE shares were set to convert into AMC stock, and that conversion was approved by shareholders in March, but it was held up by a case in Delaware Chancery Court.
For an explanation, we turned to Tom Bruni, senior writer at StockTwits, a social-media platform designed for sharing ideas between investors.
“All it does is change the one share of APE unit into a share of AMC, so you’re just eliminating the APE units entirely, and if you own one share of an APE unit, you’ll get one share of AMC stock,” Bruni said.
“Where it gets confusing is they’re doing this reverse split on AMC shares first. So technically, since the conversion is happening second, for every one share of APE unit you have, that converts to 1/10 of one share of AMC shares,” Bruni added.
The reverse stock split is set to take place on Thursday, and is meant to reduce the number of AMC shares outstanding, which will allow the company to issue more shares down the line. What’s important for investors to know is what happens to their stock on Friday. Essentially, if a trader owns 100 APE units, on Friday, that trader will have 10 AMC shares.
The Reason AMC Stock Is Trading Lower
AMC has made it clear that to continue running, it needs to earn more capital. AMC declined to provide a comment for this article, but in a letter to shareholders posted to X, formerly known as Twitter, Chief Executive Adam Aron said that by converting the APE shares to common shares, he believes “AMC will be able to raise equity capital more efficiently and on better terms in the future.”
However, AMC shares tumbled 23.1% Wednesday to $1.96, and closed at their lowest level since January 2021, according to Dow Jones Market Data. The stock has fallen 42% over the last three consecutive days, which is its worst three-day stretch since February 2021.
That likely reflects the dilution of their current shares in the conversion and the possibility that they will be diluted down the line as AMC will be able to introduce and issue more of its common stock.
What’s Next for AMC
“It’s a double-edged sword because in the short term, you’re diluting shareholders and you’re opening up the door for further dilution in the future because they can issue more shares,” Bruni says. “It’s painful because you’re being diluted, there’s probably going to be losses in the short-term, your investment is not looking so good. But from a longer term business perspective, the underlying business needs this money in order to survive and try to turn itself around.”
AMC is more than just a meme stock: it’s a movie theater company that needs to sell tickets and concessions to survive. Looking ahead, shareholders are going to want to see signs that the company is filling seats and selling snacks. That won’t be easy, according to Wedbush analyst Alicia Reese.
“AMC still faces uncertainty given the ongoing SAG-AFTRA and WGA strikes. If they go on for months longer, then AMC and other theaters could face sizable release slate holes next year, limiting their revenue and earnings potential in 2024,” Reese wrote in an Aug. 14 research note. “That said, this should be a short-term issue for them overall, and we would expect trends to remain favorable over the long term.”