Shares of AMC (NYSE:AMC) popped in early May on reports that Amazon (NASDAQ:AMZN) was in talks to acquire America’s largest theater operator. AMC stock rose as much as 56% on the takeover rumors, first reported by DailyMail.
AMC stock gave up a large chunk of those gains after Deadline Hollywood reported that their sources are saying that “there are no talks” between the two companies. As of this writing, AMC stock is up just 30%.
So, which source should you trust? DailyMail or Deadline Hollywood? And will Amazon actually try to acquire AMC?
I can’t tell you. These M&A rumors are just that: rumors. And speculating on rumors is almost like taking shots in the dark.
But, what I can tell you is this: Amazon should acquire AMC. It’d be a genius move for the e-commerce juggernaut.
Amazon Acquire and AMC Stock
Amazon should acquire AMC for one simple reason: it will dramatically boost the value prop of the Amazon Prime ecosystem.
When it comes to Amazon’s eCommerce business, it’s all about Amazon Prime. Once consumers sign up for Amazon Prime, they spend a lot more money on Amazon.com. Several studies have found that Amazon Prime shoppers spend about twice as much on Amazon.com as non-Prime shoppers.
As such, it’s fair to say that Amazon Prime is the fuel of Amazon’s eCommerce business.
An acquisition of AMC would dramatically boost the value prop of Amazon Prime, and increase both average Prime customer spend, and the number of Prime subscribers.
Just consider all the things that Amazon could do with 11,000 AMC theater screens across the world.
They could run discounts on theater admissions for Prime members, much like they’ve leveraged their Whole Foods acquisition to run discounts for Prime subs. Doing so would: 1) attract more movie-goers into the Prime ecosystem, and turn those movie-goers into big Amazon.com spenders, and 2) get Prime members to go to the movies more.
They could put Amazon Originals more frequently on the big screen, thereby increasing awareness of (and hopefully demand for) Prime video services. Increased interest in Amazon Originals could act as a funnel for consumers into the Prime ecosystem.
At the same time, they could turn parts of theaters into makeshift fulfillment centers, to even further improve delivery logistics. The more Amazon can differentiate its logistics from competitors, the more Amazon will win share in the heated eCommerce wars.
All in all, an acquisition of AMC could provide huge long-term tailwinds for the Amazon Prime ecosystem and Amazon as a whole.
Why a Blockbuster Acquisition May Not Happen
Although I believe Amazon should acquire AMC, I also understand that this acquisition may not happen.
There are really two big obstacles to this deal going through.
First, there’s AMC’s balance sheet. It’s loaded up with debt. No one wants to inherit all that debt. Not even Amazon, who could reasonably handle it but still doesn’t want the burden.
Second, there are AMC’s shareholders. AMC stock has been beaten and bruised to all-time lows amid the novel coronavirus pandemic. The company’s largest shareholders likely won’t approve an all-cash takeover offer at these levels. Even an offer with a 100% premium to the share price before today would come in just slightly above the stock’s 200-day moving average.
In order to get AMC’s biggest shareholders to approve this offer, Amazon may need to come in with a 200% or more premium on the takeover offer. That price tag may be too high for Bezos and company.
Bottom Line on AMC Stock
I like the idea of Amazon acquiring AMC. It’s a smart move, which will further differentiate the Amazon shopping experience and provide meaningful long-term growth tailwinds.
However, I also think that such an acquisition has huge obstacles today. As such, I don’t think that investors should chase the meteoric rally in AMC stock. This rally is fueled entirely on speculation. There is a good chance that this speculation won’t materialize into any takeover. If it doesn’t, AMC stock will come crashing down.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.