AMC Entertainment (NASDAQ:AMC) CEO Adam Aron told CNBC on Jan. 5 it had raised $204 million of the total $750 million it needs. That makes it more likely that AMC stock can survive, but of course, there are no guarantees.
I discussed this situation in an article last month and put together the odds that the company could survive and AMC stock would make a positive return. There would be a positive 40% expected return given that AMC raised the capital. I want to update those odds and the expected return for AMC stock.
Biggest Stick At the Table
One more piece of news to factor in is that The Wall Street Journal reported on Jan. 6 that AMC was trying to leverage the assets of its U.K. Odeon cinema group. The article said AMC was seeking 300 million GBP (about $408 million before expenses) in new credit facilities from Apollo Global Management (NYSE:APO).
Typically in these kinds of deals, the private equity funds providing the capital have horrendous fees, large amounts of warrants and odious covenants, collateral, hurdles and maintenance ratios. On top of that AMC will have to prove to its investment committee they can produce enough cash flow to cover their interest charges and stay out of bankruptcy.
In fact, I have seen situations where the hedge fund / private equity fund provided the debt capital to a struggling but valuable company even when it knew the company couldn’t handle the debt. It fully expected bankruptcy.
But being the most recent capital provider it can supersede other debt investors. It can obtain the rights to the collateral. Either that or it knew it would have a controlling stake in the company simply from a large amount of debt provided.
I can envision a situation like this where Apollo Capital wants to be the biggest stick at the bankruptcy table. To get there, it has to provide the most recent pre-bankruptcy capital.
Even if that does not occur, it would not be unusual to have to give up 10% to 20% in the form of warrants. In fact, because of this feature, we used to call these kinds of shark funds “dequity” funds – i.e., a mixture of debt and equity. The debt, combined with the warrants, especially if it can convert to equity, acts more like equity.
What To Do With AMC Stock
I suspect there is a pretty good chance that AMC can raise this $400 million. That would get it to $600 million of the $750 million it needs. At that point, a snowball effect might occur, where the remaining capital falls in place.
Therefore, I now think there is an even chance or 50% that the company will raise the capital it needs. Once that occurs the likelihood of a triple in the stock over the next year is the same probability. On the other hand, I think there is a 50% chance of bankruptcy and a 100% loss in value for AMC stock owners.
This is an improvement over my assessment last month where I thought there was a 60% chance of bankruptcy. The reason is the company has now raised $204 million and is negotiating to raise another $400 million.
The net expected return result is this: 50% times 300%, plus 50% times -100%. That reduces to 150% minus 50%, or 100%. In other words, the expected return on the AMC stock is that it will double over the next two years.
This is an improvement over last month when I estimated a 40% ROI. However, it could take two years for this set of scenarios to play out. Therefore, the average return will be 41.4% annually for two years on a compound basis.
This is a great ROI for most investors, even adjusting for the risk.
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.