AMC Entertainment plunges 23% after it settles lawsuit to convert APE units into common stock

• AMC Entertainment plunged 23% on Tuesday after it settled a shareholder lawsuit over its APE preferred stock.
• The settlement paves the way for AMC to convert APE units into AMC common shares.
• It can also move forward with a reverse-stock split and a capital raise, proposals previously rejected by shareholders.

AMC Entertainment plunged as much as 23% on Tuesday after it entered a binding settlement term sheet surrounding a shareholder lawsuit about its plan to convert its APE preferred equity units into AMC common shares.

In a SEC filing on Monday, AMC said that assuming the settlement receives court approval, it will pave the way for the movie theater chain to convert its APE units into AMC common stock, effect a 10-for-1 reverse stock split, and raise more capital by selling stock.

Shareholders had previously voted down a measure that would have given the company the authority to issue more stock to raise cash.

The movie theater chain needs to raise cash as it's not generated positive net income since the third quarter of 2018. And the box office isn't helping. The US box office has yet to reach its 2018 peak of nearly $12 billion in ticket sales. In 2022, the total box US office haul was just under $7.4 billion.

To circumvent the previous shareholder rejection, AMC CEO Adam Aron issued AMC Preferred Equity units, and it seems his plan is working.

APE shares surged as much as 20% on Tuesday to hit a high of $1.78.

Because the APE units represent an equal claim of ownership to AMC Entertainment as the common stock does, there is an arbitrage play in which both securities should converge in price. Short-seller Jim Chanos has previously traded this arbitrage setup.

With AMC common stock trading at $3.95 on Tuesday, there is more room for the two securities to move closer to each other in price, assuming AMC's settlement receives court approval.

The big decline for the stock on Tuesday is the opposite of last week's move, as the theater chain soared more than 20% on an unconfirmed report that Amazon was interested in buying the company.