AMC shareholders, be warned!

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AMC Entertainment Holdings Inc. has a clever APE trade. Basically AMC is in the business of selling tons of stock, but it ran out of stock to sell: Its corporate charter only authorizes it to issue 524,173,073 common shares, and it had issued pretty much all of them. It went to its shareholders and asked them to vote to amend the charter and allow more shares, but it couldn’t get enough votes, mostly because it has so many retail shareholders and retail shareholders tend not to vote their shares.

So it issued new preferred shares, called APEs, that are meant to have similar rights to its regular common shares. In particular, the APE shares get to vote alongside the common shares. In the beginning, AMC issued one free APE share for each common share — like a stock split, where each share was split into one common share and one APE — but then it started selling APEs for cash too. So now there are more APEs than common shares.

The APEs trade at a huge discount to the common shares, because they are weird, but AMC can fix that: It will once again ask shareholders to vote to authorize more shares, so it can convert the APEs into common shares. But this time, it expects the vote to go better, because it is asking not for a vote of common shares but for a combined vote of common shares and APEs. Hedge funds and other professional investors have bought APEs (and perhaps shorted common shares) to bet on their prices converging; those investors will be sure to vote their APE shares, because that’s what will make the prices converge. (When APEs convert into common shares, the prices will have to mechanically converge.) And there are more APEs (which trade at a discount and would benefit by authorizing more shares) than common shares (which trade at a higher price than the APEs and might lose from convergence). And AMC actually placed a big block of APE shares with a hedge fund back in December, and the hedge fund agreed to vote in favor of the share authorization.

Last week AMC formally proposed to authorize more shares; here is the proxy statement. So far it seems to be working:

AMC Entertainment Holdings Inc.’s two classes of equity securities came closer to converging Monday after the movie-theater company disclosed details of the proposals shareholders will vote on at its next shareholder meeting. 

AMC Preferred Equity Units, or “Apes,” closed Monday at $2.33, up 21%, while the company’s common shares closed at $5.01, down 9%, after the company said that on March 14 it plans to hold votes on proposals to convert all outstanding Ape units into common shares, do a 10-for-1 reverse stock split and substantially increase the number of common shares it will be able to issue in the future.

The proposed transactions could provide a potential lifeline for AMC by giving the company more options to raise cash. AMC has been struggling with weak box-office results affecting the cinema industry, while its shares have sunk close to where they were trading before the company caught fire as a meme stock in early 2021. 

Since AMC emerged as a fan favorite among individual investors, some of whom refer to themselves as “apes,” the company tried twice to get shareholder approval to enable it to issue more common shares, but failed both times due to shareholders’ concerns regarding dilution. …

“Given that Ape unit holders essentially control the vote at 64% of combined holdings and may not get another chance to extract value from those units, we expect the two proposals to pass and for this vote to open the door to a massive equity raising opportunity for the company in the coming years,” said Eric Wold, an analyst at B. Riley Securities.

I guess this is technically allowed, and I find it rather clever, though I suppose you might think it’s cheating. There is something a little unseemly about a company trying to issue more shares, failing to get shareholder approval because the shareholders worry about dilution, and solving the problem by issuing many more shares at lower prices in order to get the votes to approve more shares. As a matter of corporate finance it seems like the right move, but as a matter of shareholder relations it is a little rough.