Shares of AMC (NYSE:AMC) are down by over 7% after the company announced that it had filed a distribution agreement to sell up to 425 million AMC Preferred Equity Units (NYSE:APE) over an unspecified time period. At current prices, those units would be worth about $1.4 billion. The proceeds will be used towards general corporate purposes and to “repay, refinance, redeem or repurchase” existing debt. CEO Adam Aron, who is usually outspoken about company updates, has made no comments regarding the equity raise on Twitter (NYSE:TWTR).
APE units began trading on the NYSE last month. Around 517 million shares were initially issued as special dividends, equal to the number of AMC shares outstanding. Each unit carries the same voting rights as one share of AMC stock. At the time, Aron characterized the dividends as “perhaps the single biggest action we will take in all of 2022 to fundamentally strengthen AMC.”
Why Is AMC Stock Down Today?
The movie theater chain had previously sought to issue more AMC shares to pay down debt. However, shareholders voted against an equity raise to help pay down $5.4 billion of existing debt. As a result, the issuance of APE units can be seen as a loophole to further raise equity.
Ultimately, this is a move that will dilute both AMC and APE shareholders. Aron had tried to portray the initial APE units as a “gift,” but savvy shareholders weren’t fooled. Wedbush Securities analyst Alicia Reese also believes that AMC missed a major opportunity by not issuing more shares initially. She explains:
“If they had just issued all the [APE] shares right away – what I thought they would do, all of it at once, to repay debt — it would have rid them of their [retail] shareholder base and they would have had fundamental holders only, but a debt free company.”
Moreover, if AMC had issued around 900 million units of APE initially, it would have paid off its entire debt load, according to Reese. Excluding the initial issuance, AMC has the power to issue an additional 4.5 billion units with the board’s authorization. In a Securities and Exchange Commission (SEC) filing, AMC cautioned investors about the risks of APE units, stating that an investor should be prepared to “incur the risk of losing all or a substantial portion of your investment.”
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.