With the end of the calendar year just around the corner, normally, C-suites across corporate America witness a drastic decrease in activity. However, this annual ritual does not appear to be playing out at AMC Entertainment headquarters this year, with the company continuing to roll out new initiatives that carry potent financial ramifications. Toward the start of this week, AMC revealed that it raised gross cash proceeds of $153.2 million by selling 123.2 million AMC Preferred Equity (APE) units in Q4 2022. As a refresher, AMC announced a special dividend while revealing its Q2 2022 earnings. This dividend took the form of preferred shares, with 1 APE awarded for every AMC common share. Each APE unit entails the same rights as those conferred by the company’s common stock. AMC had billed APE units as a panacea of sorts for its chronic liquidity problems and high debt load. However, by the start of this week, the company had only managed to raise gross cash proceeds of $162.4 million by selling a total of 125.9 million APE units, equating to just around 3.24 percent of its total debt stock of around $5 billion. Also, to achieve this paltry cash raise, AMC diluted the shareholder value in APE stock by a whopping 88 percent (as of the start of the week). This brings us to yesterday when AMC made three major announcements:
The company has raised an additional $110 million by selling 72.6 million APE shares to Antara Capital, corresponding to a weighted average price of $0.660 per share. The company achieved a reduction of $100 million in the principal amount of 2026 AMC notes by swapping 91 million APE units with Antara Capital, resulting in annual interest cost savings of $10 million. When factoring in other debt-reducing efforts, AMC has now managed to reduce its total debt load by $280 million in 2022. AMC has indicated that it would seek shareholder approval for converting APE units into common shares and implementing a ten-to-one reverse stock split.
By allowing APE shares to be converted into AMC common stock, the company has incentivized arbitrage trades to try to narrow down the yawning gap between the two equity instruments. However, this step is now insufficient to restore shareholder value. AMC ended its third quarter of 2022 with $895.8 million in available liquidity, including $211.2 million of undrawn revolving credit facility. As per its press statement at the start of this week, the company expected to end its fourth quarter with available liquidity of between $725 million and $825 million. If we factor in the $110 million of additional capital raised from Antara Capital, AMC’s year-end liquidity, at max, will still be $935 million. Meanwhile, the company continues to burn cash at an average rate of $226 million per quarter, based on the $1.13 billion that AMC has burnt over the past 5 quarters. Given that a recession is largely penciled in for 2023, some analysts believe that the entertainment giant might not have sufficient liquidity to survive, thereby capping the growth prospects for AMC common shares. Consequently, with the upside for AMC common stock capped, the APE shares can only hope to appreciate to the company’s current share price level. AMC common shares are trading right now at $4.91. Even if APE shares reach this price level ahead of their probable conversion, they would still entail a loss of over 18 percent relative to their debut price of around $6 per share. Finally, perhaps recognizing that it will never be able to make the APE shareholders “whole,” AMC has announced a possible reverse stock split as a gimmick to create an illusion of value creation for its stockholders.
