AMC Entertainment craters 40% amid debut of 'APE' preferred equity and talks of competitor bankruptcy
- AMC Entertainment plunged 40% on Monday ahead of the company's issuance of "APE" preferred stock.
- The new preferred stock could one day be converted into common shares and lead to more dilution.
- AMC is also under pressure as its competitor, Cineworld, confirms that Chapter 11 bankruptcy is on the table.
AMC Entertainment stock fell as much as 40% on Monday ahead of the company's issuance of its "APE" preferred stock, which is set to begin trading on the New York Stock Exchange later today.
The preferred equity is a special dividend that could lead to more dilution for AMC investors in the future, as it can be converted to common shares if the company proposes and investors approve an increase in the number of authorized shares.
"This new AMC Preferred Equity gives AMC a currency that can be used in the future to strengthen our balance sheet, including by paying down debt or raising fresh equity. As a result, this dramatically lessens any near-term survival risk for AMC, as we continue to work our way through this pandemic," CEO Adam Aron said earlier this month.
But more dilution from the preferred stock will not happen unless AMC's investor base has a change of heart, as they rejected a proposal to increase the number of authorized shares earlier this year in fear of what more dilution would do to the stock price.
While AMC's stock price is plunging on Monday, it doesn't fully account for the value AMC investors will have once their preferred equity begins to hit their brokerage accounts and trade on the NYSE. Much of Monday's decline could be attributed to the price adjustment that occurs when a dividend is issued, depending on what price AMC's "APE" trades for.
"Remember, with the APE seeing its first trade on the NYSE at some time tomorrow morning, the value of your AMC investment will be the combination of your AMC shares and your new APE units. An AMC share plus a new APE unit added together — compared to just an AMC share previously," Aron tweeted on Sunday.
But AMC's big stock price decline on Monday could also partially be attributed to news that one of its biggest competitors is considering Chapter 11 bankruptcy.
UK-based Cineworld, which owns Regal Cinemas in the US, confirmed that Chapter 11 bankruptcy is among the strategic options it is exploring as it grapples with declining movie theater attendance and a less robust release schedule for new movies.
The weakness in AMC on Monday extends a week-long sell-off in meme stocks that was spearheaded by Bed Bath & Beyond after the struggling retailer saw one of its big investors, Ryan Cohen, sell his entire stake in the company. GameStop and Bed Bath & Beyond fell 6% and 12% in Monday morning trades, respectively.