Last Friday, shareholders of AMC Entertainment (NYSE:AMC) and AMC Preferred Equity Units (NYSE:APE) received a major surprise after Delaware’s Chancery Court Vice Chancellor Morgan Zurn ruled to block the conversion of APE stock into AMC stock. This directly went against the opinion of Special Master Elise Amato, who previously issued a recommendation in favor of the conversion. Arbitrage traders were also aware of the situation and acted by shorting AMC stock because they believed the conversion would go through.
AMC’s proposed deal, which would provide shareholders with $129 million in shares, was rejected because it would also settle potential claims made by preferred shareholders. However, preferred shareholders were not represented in the lawsuit. Per the court filing:
“Finally, the release of claims arising out of preferred interests is not supported by consideration. Awarding more shares to common stockholders necessarily comes at the expense of preferred units; the settlement consideration harms preferred unitholders.”
AMC Stock: CEO Adam Aron Issues Letter to Investors
Over the weekend, CEO Adam Aron issued a letter to investors highlighting the importance of raising equity following the decision. This need has been heightened due to the now joint writers’ and actors’ strike, which could have the effect of delaying movies scheduled to be released in 2024 and 2025. Aron also disclosed that the company had filed an updated plan to the Chancery Court. If the court agrees, Aron looks to implement the proposals approved at the last stockholder vote as soon as possible.
The letter, which conveyed a worried tone, warned that AMC could run out of cash by 2024 or 2025 if it is unable to raise equity capital. Aron brings up the bankruptcy of Regal Cinemas and parent company Cineworld, which “essentially wiped out” shareholders.
Aron takes on a more calming tone towards the end of the letter, stating that he is AMC’s “largest retail shareholder” with ownership of more than 8.3 million AMC shares or APE units. He added that he has not sold AMC or APE in over a year and a half and has no plans to sell in the near term.
“In my view, the wisest way to defeat that short thesis is to take bankruptcy risk off the table, to the extent possible,” said Aron. “And we do that by AMC being able to raise equity capital if, as and when needed.”
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.
