AMC’s Problems Mount After Canceled Share Offering

AMC Entertainment (NYSE:AMC) is navigating the tricky reopening waters. AMC stock appeared as good as dead late last year, with shares falling below $2 at one point.

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Facing heavy debt and prolonged theater shutdowns, AMC was in an impossible situation. However, tremendous social media activity around AMC and other distressed companies led to a tremendous short squeeze. AMC’s management was able to use that positive momentum to issue stock, juggle its debts, and keep the company afloat.

AMC had planned to make a game-changing capital raise this year. Originally, the company was going to sell a whopping 500 million new shares to the public, which would have ended any liquidity and debt concerns once and for all. However, management ended up abandoning that plan.

Shareholders initially cheered that decision, as it avoids heavy immediate dilution. Unfortunately, however, it means that AMC’s long-term future outlook remains fraught with risk.

AMC Stock and the Need for Cash

AMC didn’t entirely pull the stock offering. While management won’t be issuing the 500 million shares, it is still doing a 43 million share at-the-market (ATM) offering. This is better than nothing for AMC. The company should be able to raise around $400 million selling those shares if it can complete the offering around today’s price.

In the fourth quarter, AMC had an EBITDA loss of $327 million. The net income loss was far larger, but includes non-cash impairments. The EBITDA figure gives you a better sense of how much cash is actually going out the door. So raising $400 million would cover more than three months of operating losses even with theaters almost entirely shut down.

Now, however, some business is starting to come back little by little. So operating losses will shrink. Management’s plan seems to be taking things on a shorter-term basis, and to just come up with enough cash as necessary to keep the turnaround on track.

More Losses Expected

It’s hard to judge AMC’s exact cash position since it has made so many financing moves. You have share issuances, convertible debt, and heavy negotiations and deferments with the company’s landlords, among other actions. That said, it’s unlikely AMC will return to outright profitability in the near future. In fact, analysts are still projecting sizable losses even in 2023, to say nothing of the nearer term.

So the $400 million that this ATM deal will raise is not going to be the last financing move. Had AMC bit the bullet and sold 500 million shares, that would have put most liquidity concerns to rest. Instead, a dark cloud hangs over the firm.

It’s understandable why shareholders are pleased for now. 500 million new shares would have been simply massive dilution all at once. Instead, AMC is continuing to dilute more gradually. Still, until it actually has its balance sheet back in working order, analysts will remain concerned about AMC’s stability.

Valuation Is Far Higher Than You Think

There’s a key concept in investing called enterprise value. This is the total valuation being applied to a firm. It includes both the company’s equity (market capitalization) along with its net cash or debt. In the case of AMC, its enterprise value is far larger than its market cap because AMC has so much outstanding debt.

Now, AMC has an enterprise value of about $10 billion, with a little over half of that coming from debt and other obligations, as opposed to the common stock. The debt matters, of course, because a company has to keep paying its creditors in a timely fashion for the stock to have much ongoing value.

Anyway, between all the newly-issued debt and stock, AMC’s enterprise value has actually soared since the novel coronavirus pandemic. Prior to Covid-19, the company’s enterprise value was just around $5 billion. Even at its 2017 peak, AMC was worth around $7.5 billion. So investors are paying as much as 100% more now for AMC stock than they did before the virus hit. That’s not too logical.

We can debate how much lasting damage the virus will do to AMC’s business model. Many movies have moved to direct-to-streaming going forward. Regardless, it’s pretty clear that AMC isn’t actually worth more today than it was in 2017. So AMC’s stock valuation here makes little sense.

It seems retail traders are just looking at the AMC stock price in isolation and thinking it is cheap without considering the twin factors of how much  additional stock is outstanding, and all the new debt that the company has taken on to survive this crisis.

AMC Stock Verdict

In late 2020, by all appearances, AMC was likely to end up in bankruptcy. The company had already been in trouble even before the pandemic. Then, the sudden loss of nearly all revenue seemed like it would cause the company to need to reorganize its affairs with the help of bankruptcy protection. This is a tried-and-true method of turning around struggling firms.

Instead, WallStreetBets came to the rescue. By setting off a massive short squeeze, it allowed AMC the opportunity to sell stock and raise capital. The company has done so to a sufficient degree to keep the lights on in 2021. However, AMC really could have used several billion dollars more in cash to secure its long-term future. With that now apparently being scuttled, its hard to get excited about AMC stock whatsoever.

Meanwhile, the current share price already reflects a full Covid-19 recovery – and more. That’s simply too aggressive. AMC stock should slide from here.

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

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. 


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