AMC Entertainment (AMC) is an American movie theatre chain with an international presence. It’s the largest theatre chain in the world and gained meme stock status in 2021 after its stock surged amid significant retail investor interest. I am neutral on the stock.
America’s most prominent movie theatre chain is investing $27.9 million in Hycroft Mining Holding Corporation (HYMC) in exchange for a 22% stake in the entity. Hycroft is listed on the NASDAQ as a funding vehicle for the Hycroft silver & gold mine in Nevada’s Sulfur Mining district.
The project is greenfield status, with the initial geophysical report claiming that the mine contains approximately 15 million ounces of gold and 600 million ounces of silver.
Furthermore, AMC is said to receive an additional 23.4 million warrants in Hycroft at $1.07 per share. This essentially means that AMC has the option of increasing its holding in the project at a future date.
When asked about the move, the firm’s CEO, Adam Aron, said: “Our strategic investment being announced today is the result of our having identified a company in an unrelated industry that appears to be just like AMC of a year ago.”
The Financial Reporting of It All
It’s one thing to own an asset but another to bolster your financial statements.
Under the U.S. GAAP accounting laws, a 22% ownership of an entity classifies the acquisition as an investment in associates, and the financial performance of the underlying entity will be reported under the equity method.
By reporting under the equity method, AMC will have a board representative, policymaking power, an ability to make significant transactions between the parent & the subsidiary, and the luxury of interchanging personnel between the two entities.
From a financial vantage point, AMC will report all of Hycroft’s earnings, expenses, assets, and liabilities as single line items on its financial statements; however, any dividends received will be treated as a return on capital and won’t be reflected in AMC’s income statement.
Will AMC Pivot Its Core Business Activities?
So here’s the deal, AMC already had cash and short-term investments worth north of $1.5 billion on its balance sheet, meaning that its investment in Hycroft is a drop in the ocean. What I’d gather from this deal as a market participant is that we’re looking at a firm with an abundance of net worth that’s clearly looking to expand into alternative industries.
What would a pivot mean for AMC? Well, you’d assume that it would traverse into a conglomerate-type firm with media remaining its core line of business. Conglomerate stocks are safe investments but are usually considered inefficient and are priced at a discount by the stock market.
AMC had a total of 930 movie theatres as of the end of 2021, which is 2.4x the amount it operated in 2015, and the firm’s running at a lucrative cash-flow-to-CapEx ratio of 1.14. Thus, I can’t see it clamping down on its theaters soon but rather slowing down expansion and investing in other industries.
Wall Street’s Take
Turning to Wall Street, AMC has a Moderate Sell consensus rating, based on three Holds and two Sells assigned in the past three months.
The average AMC price target of $9.83 implies 35.7% downside risk.
The Bottom Line
AMC’s investment in Hycroft Mining signals an intent to pivot into a conglomerate-type business model. Its partial acquisition of the Hycroft mine in Nevada will be reported on its financial statements and will definitely add value considering the vast amount of deposits available.
However, I don’t see this event justifying a near-term price surge, and thus, I remain neutral on the stock.
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