AMC shares plummet as investors prepare for a stock conversion

An AMC Theater on March 29, 2023 in New York City.

Leonardo Munoz | Corbis News | Getty Images

Shares of AMC Entertainment plunged more than 20% on Tuesday, falling to a fresh 52-week low of $2.46 a share as investors brace for a stock swap later this week.

On Friday, the cinema chain's preferred stock, known as APE stock, is scheduled to convert to common stock, just a year after it began trading on the New York Stock Exchange.

These preferred stock units represent a solution, so to speak, giving AMC an opportunity to sell additional stock units after investors fearing dilution opposed the company's efforts to issue additional shares last year. AMC raised billions through the sale of new shares during the Covid pandemic, which helped the company pay off its debt and avoid bankruptcy while cinemas were closed or limited products were available for showing to audiences.

AMC also plans a 10-for-1 reverse stock split of its common stock on Thursday.

The company's authorized share count will increase to 550 million from 52.5 million following the reverse split, allowing AMC to issue more than 390 million shares, Roth MKM chief executive Eric Handler wrote in a research note released last week.

The stock turmoil was followed by significant back-and-forth: The theater chain was sued in February for allegedly rigging a shareholder vote that would have allowed it to convert preferred stock into common stock and issue hundreds of millions of new shares. In response to that lawsuit, a revised shareholders' agreement was approved by a Delaware judge last week.

The company's shares have nearly halved since announcing on Aug. 14 that APE shares would be converted.

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AMC's shares plummeted after the August 14 announcement of the APE conversion.

“The continued decline in AMC shares … is likely as investors focus on the strong possibility that AMC will issue large amounts of equity to pay down debt,” said Eric Wold, analyst at B. Riley Securities, on Tuesday to CNBC. “While this is expected, I think it ignores the opportunity for management to also leverage this access to capital and still elevated valuation multiple to pursue additional acquisition and expansion opportunities outside of the exhibition space.”

Wold views the stock conversion as a way for AMC to weather the ongoing post-pandemic recovery in the global trade shows industry, as well as any future impact of the ongoing writer and actor strikes in Hollywood.

Recent projections from Wold indicate that AMC is unlikely to move into positive free cash flow territory before 2025, requiring additional liquidity for the company's immediate future.

Wold currently maintains a $4.50 target price on the stock, which puts it at the high end of analysts who cover AMC.

Meanwhile, Roth MKM's handler is at the other end: his price target is only 50 cents.

“My negative view on stocks is actually a valuation call,” Handler said. “We continue to believe the company's shares are trading at an irrational valuation.”

Handler noted that AMC would need to generate nearly $1 billion in adjusted EBITDA to justify its current market cap, a number that's 78% above Roth MKM's 2024 guidance and 5% above the company's all-time high EBITDA of 929 million US dollars. generated in 2018.

Nevertheless, the liquidity worries have been cleared up for the time being, said Handler.

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