AMC Entertainment, a prominent exhibitor in the entertainment industry, executed a 1-for-10 reverse stock split as part of its strategic plan. This move preceded the anticipated conversion of its preferred “APE” shares into common stock, scheduled for Friday.
In response to the reverse stock split, AMC’s stock experienced a 25% decline during midday trading, accompanied by trading volume at five times its usual levels. This reverse split translates to one new share for every ten shares that investors previously held. Consequently, the share price automatically increased. Reverse stock splits are often seen as potentially risky maneuvers by companies seeking to boost their stock prices. Prior to the split, AMC’s shares were trading around the $2 mark; however, considering the split, they have now risen to over $14. Concerns have persisted among investors about potential dilution stemming from the APE share conversion.
When the COVID-19 pandemic led to the closure of theaters for an extended period, AMC Entertainment emerged as one of the meme stocks that gained momentum. This surge was driven by retail investors who collaborated via platforms like Reddit to coordinate their investments in struggling legacy companies. Formerly influenced primarily by private equity firms, AMC’s ownership landscape is now predominantly shaped by individual investors. While the meme stock phenomenon helped AMC evade the fate of competitors like Cineworld, the parent company of Regal Cinemas, which faced bankruptcy, CEO Adam Aron has recently voiced public apprehensions regarding liquidity issues. The company carries a substantial total debt of $9.5 billion.
In the aftermath of a ruling by a Delaware Chancery Court judge permitting the conversion of APE units into common AMC shares, the value of AMC shares has been on a gradual decline. The shares plummeted to their lowest point since 2021 immediately after the ruling. The APE initiative, named after the moniker “ape” used for investors (reflecting CEO Adam Aron’s nickname, “The Silverback”), did not yield the anticipated boost. APE shares, which have experienced a significant decrease in value since going public a year ago, also saw a 19% drop in trading volume that exceeded the norm.
According to analyst Eric Wold from B. Riley, a firm known for its optimistic stance on the exhibition sector, the increasing correlation between the movements of AMC and APE shares signifies a positive trend. This alignment could suggest that investors are beginning to look past potential short-term dilution concerns and are instead focusing on the company’s potential to leverage increased equity access. This leverage could be used to substantially reduce debt and strategically expand into high-growth sectors through acquisitions. Wold’s report acknowledges that while some investors may view AMC’s current adjusted EBITDA multiple as exceptionally high compared to historical levels and industry peers, management could exploit this situation by pursuing cost-effective acquisitions using their valuable equity.