AMC Shares Plummet as Investors Anticipate Stock Conversion
AMC Entertainment experienced a sharp decline in its shares, dropping over 20% on Tuesday and hitting a new 52-week low of $2.46 per share. This downward trend comes as investors brace themselves for a stock conversion scheduled later in the week. On Friday, the movie theater chain's preferred equity units, known as APE shares, are set to be converted into common stock, just one year after their introduction on the New York Stock Exchange.
Stock Conversion and Reverse Stock Split
The conversion of preferred equity units into common stock serves as a workaround that allows AMC to sell additional units of stock. This strategy became necessary after investors, concerned about dilution, rejected the company's previous attempts to issue additional stock. During the pandemic, AMC successfully raised billions of dollars by selling new stock, which helped the company pay off debts and avoid bankruptcy during a time when movie theaters faced closures and limited audience attendance.
In addition to the stock conversion, AMC is planning a 10-to-1 reverse stock split of its common stock on Thursday. This move will increase the company's authorized share count from 52.5 million to 550 million, enabling AMC to issue more than 390 million shares. Eric Handler, managing director at Roth MKM, highlighted this development in a research note, emphasizing the potential impact on the company's stock.
Market Response and Analyst Perspectives
The announcement of the stock conversion on August 14th caused AMC shares to nearly halve in value. Analyst Eric Wold from B. Riley Securities attributes the continued decline in AMC shares to investor concerns about the potential issuance of large amounts of equity to address the company's debt balance. However, Wold believes that this focus overlooks the opportunity for AMC's management to utilize the access to capital and the company's elevated valuation multiple for expansion and acquisition opportunities beyond the exhibition space.
Wold also sees the stock conversion as a means for AMC to navigate the prolonged recovery of the global exhibition industry after the pandemic, as well as potential future impacts from ongoing strikes in Hollywood. However, he projects that AMC is unlikely to achieve positive free cash flow until 2025, underscoring the importance of additional liquidity for the company's immediate future. Wold maintains a $4.50 price target for AMC's stock, which is on the higher end compared to other analysts covering the company.
On the other hand, Roth MKM's Handler holds a contrasting view, with a price target of just 50 cents. Handler's negative perspective is primarily based on valuation concerns. He argues that AMC would need to generate nearly $1 billion in adjusted EBITDA to justify its current market capitalization, a figure significantly higher than Roth MKM's 2024 forecast and the company's all-time high EBITDA of $929 million in 2018.
Despite differing viewpoints, Handler suggests that liquidity concerns have been temporarily alleviated. However, the future remains uncertain for AMC as it navigates the challenges of the industry and strives to meet investor expectations.
Hot Take: Implications for New Businesses
The situation at AMC Entertainment provides a compelling case study for new businesses, particularly those in industries prone to market volatility and economic downturns. The company's strategic moves, including the conversion of preferred equity units into common stock and a 10-to-1 reverse stock split, highlight the importance of innovative financial strategies to bolster liquidity and navigate challenging times.
For startups and new businesses, AMC's experience underscores the need for a well-thought-out financial strategy. Investor fears about dilution led to the rejection of AMC's initial plan to issue additional stock, demonstrating the importance of balancing growth strategies with investor interests. This could encourage new businesses to explore innovative financial mechanisms, such as stock conversions and reverse stock splits, as part of their growth strategy.
Moreover, the divergent perspectives of analysts like Eric Wold and Eric Handler on AMC's future highlight the inherent uncertainties in business forecasting. While Wold sees potential for AMC to leverage its capital for expansion and acquisition opportunities, Handler's focus is on valuation concerns. This serves as a reminder for new businesses to consider multiple scenarios and viewpoints when planning their growth trajectory.
In conclusion, AMC's current situation offers valuable lessons for new businesses, emphasizing the need for innovative financial strategies, careful consideration of investor interests, and a comprehensive approach to business forecasting.