Editor’s Note: This article was updated on Dec. 18, 2020, to correct the chance that AMC goes into bankruptcy.

AMC Entertainment Holdings (NYSE:AMC) is on its knees. AMC stock is down about 30% this week. It has taken a beating since a recent peak to $4.58 per share on Nov. 24. But Jason Mudrick, who runs Mudrick Capital, likes the company and I am inclined to possibly follow his lead.

On Dec. 11, Jason Mudrick’s firm, which specializes in distressed debt, converted $100 million of debt into AMC Class A common. It also lent another $100 million to AMC Entertainment.

According to my calculations, Mudrick now owns 12% of the outstanding 182.67 million Class A and Class B common stock. That includes Class A shares converted at $4.55 (i.e., $100 million divided by 27.88 million shares, or $4.55 per share).

Mudrick must have also known that AMC was going to raise additional capital at its expense, in terms of dilution. The theatre owner also announced it is going to raise more equity capital through the sale of 178 million Class A shares.

Only the Class A shares trade on the New York Stock Exchange. Even if that announced raise occurs, there would be 360.73 million total shares outstanding, reducing Mudrick’s stake to just 6.0%. That will reduce Mudrick’s stake further.

Liquidity Issues at AMC

What impresses me is that Mudrick was willing to convert at a huge premium to the market price, knowing it would get 50% further diluted. Moreover, on top of that, even after getting another $100 million loaned from Mudrick, AMC said it would run out of cash in January 2021. But they still converted and lent the company money.

Mudrick must have a lot of faith in AMC’s brand and/or in the possibility of a turnaround in its finances from an equity point of view.

For example, AMC also said it is burning cash at a rate of $125 million a month and cash would be zero without the equity raise. The company came clean and said it needs at least $750 million based on its model assumptions.

To do this, AMC announced it will raise equity in an at-the-market offering by selling 178 million Class A shares. However, at $2.90 per share, AMC would raise just $516 million. At an average of $3.15, the capital raise is $560 million. Even with the additional $100 million lent by Mudrick, the total is $660 million.

So it looks fairly obvious that AMC will have to sell some assets as well. One analyst suggested that AMC, the largest theatre owner in the world, could sell its U.K. Odeon operations. It paid $1 billion in 2016, so it’s possible the company could get at least $500 million in a fire sale.

Nevertheless, with one caveat, there is a good chance that AMC will succeed. The caveat is that unless AMC can get its landlords to cooperate with rent deferrals, it could be forced into bankruptcy.

That caveat could push AMC stock into a situation where it is essentially worthless. Unless, of course, Mudrick steps in again.

Think of AMC Stock as a Bet

The best way to look at AMC stock is to see it just what it is — a speculative gamble. Here is how professional gamblers operate. They look for an edge and then handicap or set probabilities to the likely outcome. Then they add up the weighted average probabilities and come up with an expected return.

In this situation, I think the investor’s edge in this scenario is the “piggyback” effect of following Mudrick Capital in AMC. This is how advantage players (APs), as professional gamblers are known, think. Let’s look at this edge.

Even a cursory read of Jason Mudrick shows that he is a smooth operator. Recently, Institutional Investor ran an interesting profile of him showing that institutional investors are putting more money in his funds. Bloomberg had a revealing interview with him showing his contrarian side and how he sees huge opportunities in distressed debt.

In fact, he seems to have had a very good track record. The Bloomberg piece and another one in the Financial Times last year said Mudrick Capital has substantially beat the averages.

Don’t forget that distressed debt investors depend to a large extent on equity returns to make money. For example, Mudrick is will have to explain to his investors if the $100 million conversion into equity doesn’t work out.

He’s the jockey, so-to-speak, AMC is the horse, but who is the owner? This brings up whether the private Chinese Wanda Group will still have a controlling stake after this capital raise.

If its stake falls below 30%, Wanda’s Class B shares will automatically turn into Class A shares. They may be forced into buying more shares to avoid this from happening.

The Expected Return in AMC Stock

There are several ways to do this. Most APs would determine the house edge first. The house edge is whether short-sellers win, the company goes into bankruptcy and AMC stock is worthless. In addition to short sellers as the house, three existing lenders are apparently trying to force the management into declaring bankruptcy.

So most APs would give this stock a greater than even chance, say 60%, that it will end up in bankruptcy. That means the risk of ruin, as APs call it, is 60% times -100%, or -60%.

However, if it does avoid bankruptcy there will be a likely double to triple home run. That is, is there is a 40% chance of at least a 250% ROI. That works out to 100% (i.e., 250% x 40% equals 100%).

Why do I say that? For one, if AMC raises the $750 million cash it needs, either through equity, debt, or asset sales, then AMC stock will likely rise. Once the public starts returning to theaters, its profitability could return.

That implies a huge turnaround in AMC stock. And don’t forget– we have an edge by piggybacking on Mudrick Capital’s equity investment.

Therefore, the expected return is at least 4o%. Add -60% to +100%. The likelihood of a zero return implies that there has to be a 71.5% or higher chance that AMC goes into bankruptcy.

Here is the bottom line: Despite what it seems, there is a good chance of an expected return of at least 40% ROI in AMC stock.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.