Shares of AMC Entertainment (NYSE:AMC) skyrocketed over 100% in after-hours trading on Friday, July 21, before finally settling at 62.95% higher. The surge came after a Delaware court ruling rejected AMC’s request to pursue its AMC Preferred Equity (NYSE:APE) share conversion to common stock. APE shares fell roughly 15% on the news. In response, AMC filed a revised proposal for its APE conversion plan on Saturday, the details of which are currently unknown.
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AMC CEO Adam Aron took to his Twitter handle, sharing an open letter to the shareholder community. In the letter, Aron is seen imploring the theater to raise cash or be prepared for bankruptcy. Aron even noted the recent failure of rival theater chain Cineworld and retailer Bed Bath & Beyond, which were affected by the same COVID-19 factors as itself.
The court’s rejection news coincides with the blockbuster weekend opening of “Barbenheimer,” the most anticipated movie duo to hit theaters recently. As per Rotten Tomatoes, Barbie grossed $155 million, and Oppenheimer earned $80.5 million in the U.S. Both of these movies were expected to fill in the empty seats at theaters and win some “House Fulls” for cinemas. CEO Aron also mentioned the premieres of these well-received movies at AMC, asking shareholders to enjoy the cinematic experience on their huge silver screens.
Details of Share Conversion Transaction
Following the issue of APEs in 2022, AMC proposed a transaction that involved converting the APE units into common stock and a 10-for-1 reverse stock split. Some shareholders filed a lawsuit against the cinema company to stop the culmination of this transaction. However, they reached a settlement that involved paying $129 million in stock grants (one additional share for every 7.5 shares held) to shareholders, but the same required a court’s approval. Delaware Judge Morgan Zurn rejected the proposed settlement on July 21, noting that “the settlement cannot be approved as submitted.”
Over 2,800 AMC shareholders objected to the transaction and informed the court about their disapproval during the ongoing litigation. A few of the issues raised by the complainants included “synthetic shares, Wall Street corruption, dark pool trading, insider trading, RICO violations, and a request for a share count.” Even so, Judge Zurn did not consider these accusations in her ruling and simply rejected the deal based on the details of the settlement claims.
AMC and APE’s History
The pandemic-triggered lockdowns severely impacted theater chains. AMC resorted to additional share offerings to keep its finances afloat. The movie chain leveraged the hype and the related share price appreciation created by the meme stock frenzy to raise cash through offerings. However, some shareholders started rejecting further equity dilution, stopping AMC from offering more shares. In response, AMC launched the convertible APEs in 2022 to raise cash. The company sold a chunk of APE units to hedge fund Antara Capital last year to solve the dual purpose of raising cash and gaining votes from the firm.
Is AMC a Buy, Sell, or Hold?
On TipRanks, AMC stock has a Moderate Sell consensus rating based on two Hold and three Sell ratings. The average AMC Entertainment price target of $2.16 implies 5.9% downside potential from current levels. Meanwhile, AMC stock has gained nearly 12%, year-to-date.
