After the market closed on July 21, a Delaware Chancery Court judge issued a surprise decision which blocks a settlement that would have allowed the conversion of AMC Entertainment Holdings, Inc.’s (NYSE: AMC) APE preferred units into AMC common stock. Many hedge funds, as well as some individual investors, were positioned long the APE preferred stock and short the underlying AMC common stock to capture a substantial return upon conversion.
The court’s ruling prompted investors to scramble to exit that matched pair. AMC common stock shares soared 63% to US$7.17 in after-hours trading while the APE units plunged 14% to US$1.54 in a vicious position unwind.
Under the now-rejected settlement which was approved by AMC shareholders in March 2023, each APE unit would have been converted on a one-for-one basis to AMC common stock. To compensate for the dilution of converting nearly one billion APE units to common stock, common shareholders would have received one new AMC common share for every 7.5 shares held. As of March 31, 2023, AMC had 519.2 million common shares outstanding.
Some AMC shareholders opposed the settlement and filed suit in the Chancery Court. The Chancery Court received a remarkable 2,800 objections to the settlement and held a two-day hearing on the matter in June 2023.
The preferred unit-to-common stock conversion would have allowed heavily indebted AMC to sell common shares to the public to raise needed cash, an avenue which is currently not open to the company. In 2021, AMC stockholders, many of them new holders who established positions during the meme stock frenzy in that year, rejected AMC’s request to authorize the issuance of new common stock to the public.
AMC needs to bring in additional cash to offset the giant amount of cash it burns each quarter from operating its movie theaters. For the twelve months ended March 31, 2023, AMC’s combined operating cash flow and capital expenditures totaled negative US$740 million. This, coupled with a debt load of US$9.7 billion (including capitalized lease liabilities), provides AMC management very little operating flexibility.
AMC ENTERTAINMENT HOLDINGS, INC.
| (in millions of US dollars, except for shares outstanding) | Twelve Months Ended March 31, 2023 | 1Q 2023 | 4Q 2022 | 3Q 2022 | 2Q 2022 |
| Revenue | $4,080 | $954 | $991 | $968 | $1,166 |
| Operating Income | ($464) | ($108) | ($224) | ($115) | ($16) |
| Operating Cash Flow | ($523) | ($190) | ($33) | ($224) | ($77) |
| Capital Expenditures | ($215) | ($47) | ($72) | ($55) | ($40) |
| Adjusted EBITDA | $116 | $7 | $15 | ($13) | $107 |
| Cash – Period End | $496 | $496 | $632 | $685 | $965 |
| Debt – Period End | $9,659 | $9,659 | $10,020 | $10,194 | $10,456 |
| Shares Outstanding (Millions) | 519.2 | 519.2 | 516.8 | 516.8 | 516.8 |
Morgan Zurn, the Delaware court’s Vice Chancellor, rejected the settlement because she considered it overly broad. Most notably, Judge Zurn was troubled that the accord would release legal claims held by AMC common stockholders, including claims involving the APE units. She believes such releases are illegal “even if some common shareholder class members happen to also hold preferred units.”
Presumably, the parties will attempt to fashion a new settlement accord that will satisfy Judge Zurn’s concerns. Given the stakes involved — principally AMC’s precarious financial situation — it seems likely some agreement will be reached. Assuming this and factoring in the now-giant spread between the prices of APE units and AMC common stock, risk tolerant investors might potentially consider establishing an APE-AMC common stock position. This spread would likely narrow if a revised accord can be reached.
AMC Entertainment Holdings, Inc. last traded at US$4.40 in regular trading on the NYSE.
Information for this story was found via Edgar and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
