AMC: Sell Before Reverse Split

Seeking Alpha2023-04-05

SummaryAMC settles lawsuit over conversion of APE units.Balance sheet remains very distressed.After reverse split, dilution likely to be quite significant.Low angle view of the exterior of an AMC ...

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国产韭菜闯阿美卡
2023-04-07
国产韭菜闯阿美卡
我刚拿上，别吓我

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The movie theater chain is seeing its shares plunge after the company announced that it had settled a lawsuit regarding the conversion of its AMC Preferred Equity Units (APE). Assuming the court approves the deal, this sets up the company to significantly dilute investors in the coming quarters to fix a giant hole in its balance sheet.As a reminder, AMC is almost up against its outstanding share limit, meaning it can't sell too many more shares to raise capital. The company launched the APE units as a way to partially get around that, but now management plans on combining the two share classes. Once this is done, a 1 for 10 reverse split will go through, along with a slight increase to the amount of shares that can be outstanding. The lawsuit aimed to prevent this conversion from going through, and the key details from the company's 8-K filing can be seen below:The settlement payment will consist of one share of Class A common stock for every 7.5 shares of Class A common stock owned by such record holders as of the Settlement Class Time (after giving effect to the Reverse Stock Split). Based on 51,919,239 shares of Class A common stock (post-Reverse Stock Split) held by the Plaintiffs' class as of March 31, 2023, an aggregate of 6,922,566 shares of Class A common stock would be issued in the Settlement Payment. With a total estimated 156,260,885 shares of Class A common stock outstanding immediately after giving effect to the Conversion of AMC Preferred Equity Units into Class A common stock (post-Reverse Stock Split and Conversion, based on AMC Preferred Equity Units outstanding as of March 31, 2023) and issuance of the Settlement Payment, the shares issued in the Settlement Payment would represent approximately 4.4% of the outstanding Class A common stock on a pro forma basis.Once the reverse split goes through, the company will likely start selling AMC shares again, with the ability to more than triple the share count if need be. As a reminder, shareholders have approved an increase in the authorized number of shares to 550 million from its roughly 524 million. The reason to sell shares is quite obvious, as the table below shows, because the company's balance sheet has gotten much weaker in recent quarters. Dollar values are in millions.Balance SheetKey Balance Sheet Items (Company Filings)While AMC has been able to reduce its debt pile a little recently, the amount of working capital is at its most negative point in two years. Even when revenues were coming in much higher prior to the pandemic, this was not a business that was generating tons of cash flow. With movie grosses recovering but not to pre-pandemic levels just yet, AMC has continued to burn cash.Domestic box office data showed a more than 3% sequential decline from Q4 to Q1, reflecting some usual seasonality. The key though is that likely means AMC revenues are forecast to decline quarter over quarter, which has analysts calling for another loss to be reported. AMC's actual cash balance was down almost a billion dollars in the past year, which is troubling as the business and revenues recover because it means you'll need more of a minimum cash balance just for day to day operations.Last year, AMC operations lost almost $400 million when excluding impairment charges. That number was before factoring interest expenses that were another $300 million plus. While the income statement should look better this year and reducing debt will eventually save on interest, it's not clear how soon this business can get back to positive cash flow territory. Maintenance capital expenditures were just over $100 million last year, and growth capex was almost that figure as well.On Tuesday, AMC shares were down more than 20%, trading around the $4 level. Even after that decline, analysts still see significant downside from here, with the average price target on the street being just $2.26. Given the amount of dilution that may be needed, that valuation seems fair at the moment. However, if the share price drops meaningfully after the reverse split before management can start to sell shares, even more dilution will likely add more pressure on the stock.In the end, investors should sell AMC while they still have the chance. The company settled the lawsuit regarding the conversion of its APE units, which paves the way for the company to reverse split its stock and then start diluting its investors quite significantly. As results continue to be pressured with the theater business not back to pre-pandemic levels yet, the balance sheet remains in very poor shape. Even with Tuesday's big decline, there's still the potential for quite a bit of downside from here.This article is written by Bill Maurer for reference only. 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