AMC Reverse Stock Split: A Catalyst for Downward Trajectory of Stock
Days of meme stock mania are over for AMC. The share price which reached $60 on 18th June 2021 due to retail investors’ popularity on a platform like Reddit has been in a downward trajectory since then and touched a low of $3.92 on December 30th, 2022. With this fall, 2022 is considered one of the worst years for AMC, and the share price has fallen 84% in the last year. There has been a considerable number of events happening for the company responsible for this fall and the proposal of a reverse split is the latest one among them.
AMC Reverse Stock Split: Details
Proposal of Reverse stock split – On December 22nd, 2022, AMC Entertainment shared a press release just before the trading hours which included information aimed at boosting the confidence of investors. However, investors were not impressed and the shares fell by more than 7%. In the press release, there were several announcements, but one of the most important is the proposal of the reverse stock split of shares at a 1:10 ratio. A special meeting is proposed for the investors of APE (AMC Preferred Equity) and AMC shareholders to vote on this.
Hence, the reverse stock split is not executed yet, it is only proposed and will be voted on in a meeting. If the proposal is passed, the shareholders will receive 1 share for every 10 shares held, and the share price will be multiplied by 10. Except for this proposal, AMC Entertainment has not executed any stock split in its trading history.
There is a second proposal of increasing the authorized number of AMC common shares to permit the conversion of APE units into AMC common shares. The current number of outstanding shares for AMC and APE is 516.84 million. If the proposal of conversion of APE units to AMC is passed, then the number of outstanding will be multiplied by 2 and then the 1:10 reverse split will effectively be a 1:5 reverse split.
In short, if both the proposals are passed at the special meeting of shareholders, the number of outstanding shares will be 103 million, but the share price will be multiplied by 10 and will be in the range of $40 (according to the current share price).
AMC Reverse Stock Split: New Capital Raise
In the December 22nd, 2022 press release, along with the proposal of the reverse split, there were other important announcements as well. AMC announced a plan to raise new equity capital worth $110 million. The company plans to sell $110 million worth of APE units issued last spring to the debt holder of the company, Antara Capital. The decided selling price of APE shares is 66 cents apiece. APE shares were trading at 69 cents apiece on 21st December. It shot up 176% within a week of this announcement and made a high of $1.91 on December 27th.
Along with this purchase, Antara will also exchange the $100 million principal amount due by 2026 for 91 million APE units. This will reduce AMC’s outstanding debt by 100 million and save annual interest expenses by approximately $10 million. The sale of APE units to Antara will be done in two tranches. The first tranche is of immediate purchase of 60 million APE units at the market program. The second tranche of 106.6 million units and $100 million debt exchange will be completed later.
As APE units are proposed to be converted into AMC, Antara will hold the shares for up to 90 days and will vote in favor of proposals in the special meeting. With this deal with Antara, AMC Entertainment will raise $272 million of additional cash through the sale of APE units in the last 90 days. Additionally, $180 million of debt reduction has already been accomplished by AMC in 2022.
According to AMC’s CEO Adam Aron, the company is achieving the intended purpose from APE units. This has allowed the company to raise cash, reduce debt and deleverage the balance sheet to carry out possible merger and acquisition activities. However, the APE shares are trading at a big discount to AMC shares and hence it is in the best interests of shareholders to convert them to AMC shares and simplify the capital structure.
AMC Reverse Split: Likely Impact on the Stock Price
In general, a reverse split is taken as negative news for a particular stock. It is seen as a last resort to lifting the share price artificially when the company’s financials cannot do the same. It indicates possible problems within the company. The story is not different for AMC Entertainment. Market participants have not welcomed the press release for the proposal of the reverse split. The share price is down nearly 20% since the announcement of the news.
In all likelihood, the proposal for a reverse split and conversion of APE shares into AMC shares will be passed in the special meeting and it will artificially rise the price to nearly $40. But management has taken this decision to remove the tag of penny stock from AMC shares as it restricts various institutional investors from investing in AMC as they set the cut-off price as $5. Additionally, if the share price falls below $1, it could result in delisting from the stock exchanges.
AMC reported troubling figures for the last quarter that ended September 30th, 2022. It reported a net loss of $226.9 million for the third quarter and $685.9 million for the first nine months of 2022. AMC earnings for the last quarter were -0.20 per share and it has total liabilities of 11.79 billion. CEO Adam Aron mentioned that AMC has cleared $180 million of debt in the year 2022.
AMC Reverse Split: Conclusion
AMC has fundamental problems in the company. The company is burning more cash than it can produce from its operations. As a result, the company has ever-growing debt. Additionally, it has taken a lot of debt during the pandemic to stay afloat which is hurting the stock now (Stock is down 82% in the last 12 months).
The proposal of reverse split and conversion of APE units into AMC shares are just measures of raising more capital in the future and removing the tag of penny stock. Investors must wait for a turnaround in the net income before investing in AMC.