AMC Leisure’s No-Win State of affairs | The Motley Idiot

A new year brought a new kind of volatility to Wall Street. While the coronavirus pandemic brought stocks to their knees last year, retail investors are a major cause of stock volatility in 2021.

Starting in mid-January, private investors joined forces in Reddit’s wallroom chat room WallStreetBets (WSB) to buy stocks and cancel options in stocks with very high short interest. The goal for these mostly young and inexperienced investors was to: a short press. Since institutional investors and hedge funds hold a large proportion of the short sales in the stocks targeted by the WSB community, this has been interpreted as a battle between private investors and the so-called “big money”.

While there have been dozens of stocks that have benefited, at least temporarily, from the efforts of the WSB community, the video games and accessories retailer GameStop and cinema chain AMC Entertainment ((NYSE: AMC) were the contact point for private investors. AMC is arguably the most polarizing between the two.

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Arguments from private investors in favor of AMC

There’s no shortage of reasons the WSB investor army believes AMC will hit a higher price. Most important among them is the idea that there will be another pressure that could be even greater than that which sent stocks from $ 2 to $ 20 in just a few days this year. As of mid-March, data from Morning star showed that 49.3 million AMC shares were barely held. That’s around 1.2 million shares as of mid-February. The hope here is that one or more good news events could cause pessimists to steer an exit and drive AMC’s share price higher. Of course, given that AMC’s short ratio has dropped sharply over the past few months, an ongoing short squeeze looks extremely unlikely.

Private investors are too great supporters of the reopening trade. The United States leads the developed world when it comes to coronavirus vaccinations. The faster adults are vaccinated, the more likely it is that life can return to its normal pre-pandemic condition. In the case of AMC, this could mean reducing or removing restrictions on theater capacity. Remember, it’s not just about the movies consumers will see. It’s about getting more people to the high-margin concession stands.

Enthusiasts have also championed AMC’s fundraising efforts. Since the pandemic began, the company has raised $ 2.8 billion through stock offerings and debt, according to CEO Adam Aron. In the company’s fourth quarter earnings report, the company found more than $ 1 billion in cash available.

A blank paper certificate for shares in a publicly traded company.

Image source: Getty Images.

AMC is weeks away from a no-win scenario

On the other hand, I made no secret of the fact that it was me extremely skeptical of AMC’s ability to turn its business around, or perhaps even survive in the long run. The way I see it, AMC Entertainment is only a few weeks away from a no-win scenario.

The company was already in March submitted a power of attorney The US Securities and Exchange Commission has expressed a desire to put a number of items up for vote by its shareholders on May 4th Issue up to 500 million shares of class A shares. If approved, this would effectively double the existing approval and allow the issuance of up to 1.024 billion shares.

To be clear, AMC isn’t necessarily going to issue stocks. According to Aron in an interview with CNBC:

The dilution is important to us, but I would also like to tell you that we are formally asking our shareholders for approval to approve an additional 500 million shares that the company could issue if they choose. Our shareholders have many advantages when they have board approved shares in the market. We will be sensitive to dilution issues. At the same time, however, there is an opportunity to strengthen our cash reserves. There is an option to buy back debt at a discount. There may be an opportunity to take over some of our deferred theater rentals. Settlement with shares instead of cash; Perhaps there is a merger and acquisition opportunity where we could buy other companies cheaply by using our stocks as currency. There are many good reasons for shareholders to authorize us to have more shares.

A hand reaching for a neat stack of $ 100 bills in a mousetrap.

Image source: Getty Images.

I can appreciate Aron’s cheerleading, but it’s wrong at best. To believe that AMC would consider using its shares as currency for acquisitions when it sees $ 11 billion in convertible and non-convertible debt on its balance sheet as of mid-February is stupid, according to S&P Global Market Intelligence (with a small amount). f ‘).

What happens on May 4th is a no profit situation for Aron, AMC and the company’s shareholders. If shareholders agree to the measure, AMC is likely to guarantee its survival for a long time. However, if you get a free pass to double the number of shares outstanding, the company’s share price will be capped – that is, the rallies are achieved by AMC when stocks are sold at strength – and it is likely destroy the hopes of private investors.

In the meantime, if shareholders vote against the measure, it will be very difficult for AMC to raise the capital it needs to survive. Cash in excess of $ 1 billion avoids the company’s immediate bankruptcy concerns, but does nothing to alleviate the company’s ongoing losses with reduced capacity in theaters. With $ 7.2 billion in debt to repay in 2026 (of which $ 6.04 billion is traditional and cannot be converted to equity), AMC has virtually no hope of surviving another five years without being able to spend hundreds of millions of additional debt shares.

No matter what happens to the vote on May 4th, the result is not a good one. Approval of the stock offering appears to be the lesser of the two evils, as it would give AMC the least chance of long-term survival. But with the company’s sales The prepandemic is not expected to be reached by at least 2024Given the dilution it would take to ensure its survival, a return to a low single-digit stock price looks likely.

This article reflects the opinion of the author who may disagree with the “official” referral position of a Motley Fool Premium Consulting Service. We are colorful! Questioning an investment thesis – including one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.