AMC’s new ‘APE’ units are a meme-friendly way to raise cash fast

AMC Leisure has launched into a meme-friendly experiment to present a token reward to its retail investor base whereas additionally making a backdoor option to increase extra cash down the road.

The theater chain’s new most popular share class — referred to as “APE” models — start buying and selling on Monday after being distributed to shareholders as a dividend final week.  “APE” stands for AMC most popular fairness.

The particular dividend appears to be in step with CEO Adam Aron’s aggressive advertising efforts to attraction to the retail traders who name themselves “Apes” and have rallied round AMC over the previous yr and a half.

In some methods, the brand new shares are much like the advantages of free popcorn and unique screenings that Aron has rolled out in current months.

Nonetheless, the APE models are a company finance instrument at their core as a result of the shares create a brand new method for AMC to lift cash. When its inventory value soared in 2021, the beleaguered theater chain bought thousands and thousands of widespread shares to maintain itself afloat in the course of the pandemic, however finally it ran out of its allotment. Shareholders declined to approve extra gross sales.

The preliminary APE models have been distributed freed from cost, however the firm’s filings say it has the precise to promote extra of the models sooner or later — with out extra shareholder approval. AMC stated it’s at the moment licensed to challenge as much as 1 billion APE models, and that it distributed slightly greater than half of that complete with the dividend. 

Aron has made it recognized that the corporate might train the precise to promote the remaining to lift money. 

“We imagine APES ought to let AMC increase capital, pay debt and do extra. Not excellent news for the doubters,” Aron stated in a tweet. 

And AMC, which reported greater than $10 billion in debt and different long-term liabilities on the finish of second quarter, may have to lift money. 

Whereas there have been some large film hits this yr, and studios are signaling a pullback from streaming-only releases, the U.S. field workplace stays nicely beneath its pre-pandemic ranges. Rival Cineworld, which owns the Regal Cinemas chain, stated Monday that it’s contemplating submitting for chapter.

AMC elevating extra cash via the APE models wouldn’t be a shock on Wall Avenue. 

“The creation of the APE Unit gives AMC with a path to lift incremental capital within the fairness market. … We suspect AMC will benefit from its present share value to decrease its debt stability,” Citi analyst Jason Bazinet, who has a promote ranking on the inventory, stated in a notice to purchasers on Aug. 15. 

Whereas the underside line influence for AMC of the APE models won’t be clear for some time, there are particulars that traders in each the APE models and the widespread inventory ought to know now. Right here is an outline of how the dividend course of works and what shareholders ought to know. 

The APE models have been distributed as dividends on Friday. In some methods, the weird transfer resembles a inventory cut up, the place traders get extra inventory proportional to each one share they beforehand owned. Every APE unit could also be transformed sooner or later to at least one widespread share of AMC, making this transfer like a 2-for-1 cut up.

In principle, that ought to knock down the value of AMC’s inventory. 

“It is successfully a two-for-one inventory cut up and I might anticipate that when it turns into efficient, that the value per share ought to drop by about 50%. Simply as occurs usually with a two-for-one inventory cut up,” stated Jay Ritter, the Cordell professor of finance on the College of Florida. 

On this case, nonetheless, the 2 shares are totally different courses. The brand new APE models commerce underneath the ticker “APE,” whereas the AMC widespread shares will proceed to commerce underneath “AMC.”

Shares of AMC have been down practically 42% on Monday. The brand new APE models closed their first day of buying and selling at $6 per share, offsetting a lot of the losses within the widespread inventory. When adjusted for APE’s value at its first commerce, shares of AMC have been down 5.5% on Monday.

As soon as the APE models are distributed, they’re now not linked to the AMC shares and may be purchased or bought individually. 

A doc from AMC in regards to the providing says that the APE dividend shouldn’t be anticipated to be a taxable occasion for U.S. traders. Nonetheless, traders who personal partial shares of AMC could obtain a small money portion as an alternative of fractional APE models, which might be taxable. The doc additionally stated that some brokerages could take “a number of days” to switch the APE models into particular person accounts.

As a result of the APE models are most popular fairness, there are totally different rights in a possible chapter continuing than the common widespread inventory.

Within the securities submitting detailing the providing, AMC states that the APE models are above the widespread inventory however beneath debt within the capital construction. That signifies that APE unit shareholders would receives a commission earlier than widespread inventory shareholders in a possible chapter. 

Given AMC’s unsure future, that discrepancy might trigger the share costs of the APE models and the AMC inventory to diverge. 

“It would not shock me in any respect if the APE shares promote at a premium over the AMC widespread shares … [because] within the occasion of chapter, the popular shareholders would have precedence over the widespread shareholders,” Ritter stated. 

The issuance of recent shares raises issues about dilution for current shareholders. This is likely one of the explanation why AMC shareholders had rejected the corporate’s earlier efforts to challenge extra widespread inventory.

If AMC have been to promote extra most popular shares, current shareholders would see their declare on the belongings and potential earnings of the struggling theater chain watered-down even additional.

“AMC nonetheless has an upside-down capital construction that has seen a 400% improve in shares excellent because the begin of the pandemic together with its sizable $5.4bn debt load,” MKM Companions analyst Eric Handler wrote in a notice to purchasers on Aug. 5. “The creation of a Most popular Fairness Items (APE) class of inventory as soon as once more gives AMC with dry powder to challenge new shares for funding functions. … The important thing query although from right here is will future share issuances show accretive or dilutive.”

Handler has a promote ranking and a value goal of simply $1 per share on AMC.

Aron, for his half, has forcefully pushed again on dilution issues, declaring that the preliminary APE dividend doesn’t change the possession place for current shareholders. He has additionally argued that dilution could be value it if it helps AMC increase wanted money. 

“There’s unhealthy dilution and good dilution. If added liquidity gained from dilution is wasted, it is unhealthy. Nonetheless, if properly dealt with, it’s good. Certainly, for AMC in 2021, it was really nice for our shareholders,” Aron tweeted on Aug. 6.

The additional money might be used to fund acquisitions of different theaters, pay down debt and even push into unrelated companies, like AMC’s 2021 buy of a giant stake in a gold mining firm.

— CNBC’s Michael Bloom contributed reporting.