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AMC Entertainment (NYSE:AMC) has been relying on financial wizardry and gimmicks to obfuscate and deflect attention from its persistent cash scarcity. This was the general take in the halls of finance last year when the company issued AMC Preferred Equity (APE) units that carried the tag of eventual convertibility to common shares, essentially creating a largely redundant security for the express purpose of raising more capital. Well, this complexity that AMC needlessly introduced into its capital structure is now coming home to roost.
Back in the summer of 2021, AMC issued a special dividend of 1 APE share to every common stockholder. Bear in mind that the rationale behind preferred shares usually relates to the precedence that this share class receives over common shareholders in a bankruptcy. However, by issuing preferred shares to every common stockholder of record in the summer of 2021, AMC essentially nullified this thesis. Instead, the company has been issuing APE units in droves to raise additional cash and pay down its debt. Since APE units came with an eventual convertibility tag, their price should have traded in sync with the company's common shares. Instead, the APE units have been suffering from a persistent discount relative to their common equity counterparts, suggesting widespread investor skepticism.
AMC raised around $2 billion from investors in 2021, significantly diluting its share base in the process. This dilution-on-steroids attracted well-deserved ire from investors. In March 2023, AMC sought authorization from its shareholders to increase its common stock count by around 10x, concurrent with a 10-to-1 reverse stock split. Interestingly, the company glued this authorization with another proposal to convert its APE units into common equity. After accounting for APE convertibility, the increase in AMC's share authorization would allow the company to raise additional capital. To no one's surprise, the two proposals put forth in the special meeting were approved by shareholders. Some AMC investors were, however, able to obtain a status quo order from the court, alleging that they were short-changed in the voting process. The order allowed AMC to tabulate votes in the designated meeting of the shareholders but take no further action.
Breaking: $AMC $APE reaches binding settlement to increase authorized shares from 524,173,073, to 550,000,000
Will permit reverse split 1-10
Still will require approval
Giving more to $AMC vs $APE to get to agreeement: 6,922,566 issued as a settlement payment, 4.4% PF Class A
— Special Situations 🌐 Research Newsletter (Jay) (@SpecialSitsNews) April 3, 2023
In order to resolve the issue of the status quo order, AMC hastily negotiated a settlement with its litigant shareholders. Under the terms of the agreement, immediately after the conversion of APE units into common equity, AMC would issue one additional share for every 7.5 common shares held (or 6.9 million common shares in total). This payment, which could be worth over $100 million, was meant to compensate investors.
After all is said and done, including the reverse stock split, AMC's outstanding shares would stand at 156 million, with an authorization to issue 394 million shares, equating to as much as $16 billion, as per a tabulation by B. Riley.
$AMC $APE
"Final settlement of the Shareholder Litigation will be subject to a formal settlement agreement and formal court approval"Keep and eye out tomorrow & in general: https://t.co/CaQfQ6SrAN
Filing: https://t.co/pLnG6cX94t pic.twitter.com/smEebNTWhj
— ℕ𝕚𝕔𝕜 G. - The Solar Guy (@goad_solar) April 4, 2023
On Monday, AMC filed this settlement agreement. The expectation was that the presiding judge in the case would lift the status quo order, allowing AMC to proceed with the conversion of APE units and, eventually, raise some much-needed cash by leveraging its increased share count authorization.
The Court of Chancery Has Declined to Vacate the Status Quo Order Against AMC
In an unexpected development, the Vice Chancellor of the Delaware Court of Chancery, Morgan T. Zurn, has denied AMC's motion to vacate the status quo order. The judge noted in his ruling:
"This Court has cautioned against parties performing even partial settlement obligations before a settlement hearing, as doing so prevents the Court from meeting its obligation to oversee class action settlements."
The ruling goes on:
"In the absence of any demonstrated need to reorder the established and purposeful order of operations, I must conclude that harm to the putative class suffered by foregoing Rule 23's required protections of proper notice, opportunity to object, and approval exceeds the benefit of receiving the common stock sooner."
Essentially, Zurn has asserted that AMC was not able to demonstrate any need to expedite the court's proceedings. Moreover, the company's undue haste in reaching a settlement might harm the interest of investors by removing the "required protections of proper notice, opportunity to object, and approval."
Meanwhile, AMC common shares are up around 7 percent in after-hours trading. The APE units are down nearly 13 percent. This suggests that a value convergence between the two securities remains a pipe dream for now.
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