Seeking Alpha • Sep 26
Why I've Taken A Position In AMC's APE Units
Summary
AMC issued preferred shares in order to be able to raise equity.
These preferred shares are economically equivalent to, or even slightly better than, AMC shares.
Nonetheless, the preferred shares are trading at a substantial discount to AMC shares.
I give my assessment of why this might be, and then explain why I have bought the preferred shares.
In this article I explain why I've taken a speculative long position in AMC Preferred Equity Units (APE). I'll also discuss a possible pair trade that in theory should be less risky than an outright long position in APE.
What is APE?
The genesis of these preferred units is a little bit convoluted. Essentially AMC (AMC) wanted to issue more common shares to raise money and pay off debt, but because shareholders didn't want to be diluted, they voted against authorizing more shares to be issued. AMC currently has 516,820,595 common shares issued (not including any to be issued on the exercise of options) with 524,173,073 authorized so it is essentially capped in the number of new shares it can issue. In order to bypass this limit, AMC decided to issue preferred shares (of which there are plenty of unissued authorized shares available) as a special dividend to the common shares. As we'll see in detail below, these preferred shares are intended to be equivalent to common shares, the only difference being that AMC can issue more of them to raise cash. And by first issuing the stock as a dividend, it creates an active market into which the company can eventually sell more preferred shares.
This 8-K SEC filing has many of the key details, the most important of which are (with my emphasis):
Each AMC Preferred Equity Unit is a depositary share and represents an interest in one one-hundredth (1/100th) of a share of Preferred Stock. Each AMC Preferred Equity Unit is designed to have the same economic and voting rights as a share of Common Stock
Each AMC Preferred Equity Unit, by virtue of its interest in the underlying Preferred Stock is automatically convertible into one (1) share of Common Stock upon effectiveness of the Common Stock Amendment
To provide for the authorization of a sufficient number of authorized and unissued and unreserved shares of the Common Stock into which the Preferred Stock (and, by virtue of such conversion, AMC Preferred Equity Units) can convert in full, the Company may seek to obtain the requisite stockholder approval
Under Delaware law, the affirmative vote of holders of at least a majority in voting power of the Company's outstanding capital stock will be required for stockholder approval of the Common Stock Amendment. The holders of the AMC Preferred Equity Units will be entitled to vote on the Common Stock Amendment.
The Company expects that the AMC Preferred Equity Units will serve as a "currency" to raise additional equity capital to strengthen its balance sheet, including debt repayments, and provide capital for opportunistic and value-enhancing and transformative acquisitions and/or investments. Any dilution caused by future sales of AMC Preferred Equity Units could adversely affect the market price of the AMC Preferred Equity Units and the Common Stock.
For those who prefer tabular representations, this exhibit may also be helpful.
SEC exhibit
So APE is intended to be equivalent to AMC common stock (though it would have a higher standing in the event of liquidation), but currently it isn't exchangeable because shareholders haven't yet voted on the Common Stock Amendment and no date has yet been set for this vote. However, at least in my opinion, if APE continues to trade below the AMC share price, and given that APE shareholders can vote on the Stock Amendment, eventually this vote will have to take place and I would assume it would be ratified since that would be in APE shareholders' best interest. Moreover, if over time AMC issues more APE preferred shares, then these will outnumber the number of AMC shares making a positive vote that much more likely.
This eventual equivalence is the basis for my speculative long position, but before I discuss that, let's look at a few more issues, including delving into the company itself.
Why APE?
For those who don't follow social media, the preferred shares were named and given their symbol in deference to the "army" of reddit posters who ran AMC stock up last year as one of the "meme" stocks (like GME) and who call themselves "apes".
AMC Theatres
According to its website:
AMC is the largest movie exhibition company in the United States, the largest in Europe and the largest throughout the world with approximately 1,000 theatres and 11,000 screens across the globe. AMC has propelled innovation in the exhibition industry by: deploying its Signature power-recliner seats; delivering enhanced food and beverage choices; generating greater guest engagement through its loyalty and subscription programs, web site and mobile apps; offering premium large format experiences and playing a wide variety of content including the latest Hollywood releases and independent programming.
Revenues
AMC revenues took a huge hit during the pandemic and still haven't recovered to pre pandemic levels.
Data by YCharts
In its most recent 10-Q, the company sounded an optimistic note on the subject, stating (with my emphasis):
In order to achieve net positive operating cash flows and long-term profitability, the Company believes that box office revenues will need to increase significantly compared to 2021 and the combined first and second quarter of 2022 to levels in line with pre COVID-19 box office revenues. The Company believes the global re-opening of its theatres, the anticipated volume of titles available for theatrical release, and the anticipated broad appeal of many of those titles will support increased attendance levels. The Company believes that recent attendance levels are positive signs of continued demand for the moviegoing experience. For the six months ended June 30, 2022 attendance was 98.2 million patrons, a 69.3 million patron increase from the approximately 28.9 million patrons for the six months ended June 30, 2021
Domestic vs International
AMC's revenues are derived principally (75%) in the US, with the remaining 25% generated internationally.
10-Q
Losses
AMC is still running losses, but as mentioned above, this might turn around if it can return to pre-pandemic revenue levels. However the company has never been particularly profitable as shown in the chart below.
Data by YCharts
Heavily Indebted
AMC's balance sheet carries a substantial amount of debt, and its current liabilities exceed its current assets, both of which explain why the company is so intent on issuing more equity in the near term.
10-Q
Valuation and Ratings
Given its unprofitability and its high debt and poor current ratio, it's not surprising that both the SA quant ratings and analysts' are bearish on the company. For example, the SA quant rating is a 2.06 which is a sell, with low factor ratings on valuation and profitability (along with momentum):
Seeking Alpha
Likewise, analysts also have a sell rating on the company:
Seeking Alpha
Long term I agree with these appraisals, but given the huge structural discrepancy between the AMC and APE share prices, I've gone long APE for a shorter term trade.
Competitors
Recently the second biggest international movie-theatre chain declared bankruptcy, which is an indication that this is also a risk for AMC (see my last section below). However, AMC's CEO noted that AMC is in a much different position because it was able to raise cash over the past few years. Specifically he said:
