AMC’s new ‘APE’ units are a meme-friendly way to raise cash fast

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AMC Entertainment has embarked on a meme-friendly experiment to give a token reward to its retail investor base while also creating a backdoor to raise more money later.

The theater chain’s new preferred share class — called “APE” units — will begin trading Monday after being paid as a dividend to shareholders last week. “APE” stands for AMC Preferred Stock.

The special dividend appears to be consistent with CEO Adam Aron’s aggressive marketing efforts to appeal to the private investors who call themselves “Monkeys” and have gathered around AMC for the past year and a half.

In some ways, the new shares are similar to the benefits of free popcorn and exclusive screenings that Aron has been rolling out in recent months.

However, the APE units are a corporate finance tool at their core, as the stock creates a new way for AMC to raise money. When its share price skyrocketed in 2021, the beleaguered theater chain sold millions of common shares to prop itself up amid the pandemic, but eventually ran out of allotment. Shareholders declined to approve additional sales.

The first APE units were distributed for free, but the company’s filings say it has the right to sell more of the units in the future — without additional shareholder approval. AMC said it is currently authorized to issue up to 1 billion APE units, and is paying out just over half of that total with the dividend.

Aron has indicated that the company could exercise the right to sell the remainder to raise money.

“We believe APES should let AMC raise capital, pay debt and do more. Not good news for the doubters,” Aron said in a tweet.

And AMC, which reported more than $10 billion in debt and other long-term debt at the end of the second quarter, may need to raise cash.

While there have been some big movie hits this year and studios signal a slump in streaming-only releases, the US box office remains well below pre-pandemic levels. Rival Cineworld, owner of the Regal Cinemas chain, said Monday it was considering filing for bankruptcy.

AMC raising additional money through the APE units would come as no surprise on Wall Street.

“The creation of the APE unit provides AMC with a way to raise incremental capital in the stock market. … We suspect that AMC will take advantage of the current stock price to reduce its debt balance,” Citi analyst Jason Bazinet, who sales rating on the stock, said in a note to customers on Aug. 15.

While the ultimate impact to AMC of the APE units will not be clear for the time being, there are details that investors in both the APE units and the common stock should know now. Shares of AMC fell nearly 37% on Monday. Here’s an overview of how the dividend process works and what shareholders need to know.

How the dividend works

The APE shares were paid as a dividend on Friday. In some ways, the unusual move resembles a stock split, in which investors receive additional shares proportional to each share they previously owned. Each APE unit can be converted to one common AMC share in the future, making this move like a 2-for-1 split.

In theory, that should push the price of AMC’s stock down.

“It’s basically a two-for-one stock split and I would expect that once it takes effect, the price per share should drop about 50%. Just like what normally happens with a two-for-one stock split,” he said. Jay Ritter, the Cordell professor of finance at the University of Florida.

In this case, however, the two stocks are different classes. The new APE units will trade under the ticker ‘APE’, while AMC’s common stock will continue to trade under ‘AMC’.

Once the APE units have been divided, they are no longer linked to the AMC shares and can be bought or sold separately.

An AMC document on the offering says the APE dividend is not expected to be a taxable event for US investors. However, investors who own partial shares of AMC may receive a small portion in cash rather than fractional APE units, which may be taxable. The document also said it takes some brokers “several days” to transfer the APE units to individual accounts.

Bankruptcy Considerations

Because the APE units are preferred stock, there are different rights in a possible bankruptcy proceeding than the common stock.

In the securities filing describing the offering, AMC states that the APE units are above common stock but below debt in the capital structure. That means shareholders of APE units would be paid earlier than common shareholders in a possible bankruptcy.

Given AMC’s uncertain future, that discrepancy could cause the stock prices of the APE units and the AMC stock to diverge.

“I wouldn’t be surprised at all if the APE shares are sold at a premium over the regular AMC shares… [because] in the event of bankruptcy, the preferred shareholders take precedence over the common shareholders,” said Ritter.

Potential dilution

The issuance of new shares raises concerns about dilution among existing shareholders. This is one of the reasons AMC shareholders had rejected the company’s previous attempts to issue more common stock.

If AMC sold additional preferred stock, existing shareholders would see their claim to the struggling theater chain’s assets and potential profits diluted even further.

“AMC still has a reverse capital structure that has seen a 400% increase in the number of outstanding shares since the start of the pandemic, along with its significant $5.4 billion debt load,” wrote Eric Handler, analyst at MKM Partners. , on Aug. 7 in a note to customers. 5. “The creation of a Preferred Equity Units (APE) share class once again provides AMC with powder to issue new shares for investment purposes. … However, the key question is whether future share issuances will be contributing or dilutive.”

Handler has a sell rating and a price target of just $1 per share on AMC.

Aron, for his part, has strongly pushed back dilution concerns, pointing out that the initial APE dividend does not change the ownership position for existing shareholders. He has also argued that dilution would be worthwhile if the AMC helps raise the funds it needs.

“There’s bad dilution and good dilution. If added liquidity gained through dilution is wasted, that’s bad. However, if handled wisely, it’s good. Indeed, for AMC in 2021 it was actually great for our shareholders Aron tweeted on Aug. 6.

The extra money could be used to fund acquisitions of other theaters, pay off debt, or even attract unrelated businesses, such as AMC’s 2021 purchase of a large stake in a gold mining company.

— CNBC’s Michael Bloom contributed to the report.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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