AMC Entertainment (NYSE:AMC) stock is down about 20% today, adding to the company’s 20% losses Monday, ahead of the company’s long-anticipated conversion of AMC Preferred Equity Units (NYSE:APE) into common stock. Indeed, the theater chain announced this Thursday, Aug. 24, will be the last day of trade for AMC Preferred Equity Units. As of Aug. 25, all of APE stock be converted into common stock, unifying the classes of AMC shares.
What do you need to know about the apparently bearish share conversion?
Well, after a fairly involved legal debacle, it appears the sometimes meme-darling will have its way after all. AMC has been battling legal opposition from some stock owners after shareholders voted earlier this spring to increase the total number of shares, the conversion of APE units, and execution of a reverse stock split.
Some shareholders sued AMC, arguing its issuance of APE units was intended to skirt common shareholders’ voting integrity. For better or worse, Delaware Chancery Court approved the share conversion on Aug. 11.
If you recall, APE units first started trading on the New York Stock Exchange in 2022 as a means to help the struggling company pay down its growing debt.
Unfortunately, since the release of APE units in August 2022, AMC stock has only seen red. In fact, since it hit $24 a share on Aug. 12, 2022, AMC is down about 90%, currently trading for just $2.51 a share.
AMC Stock Slides on APE Conversion, Reverse Stock Split
As part of the approved shareholder agreement, AMC stock will also undergo a 10-for-1 reverse stock split. This means that every 10 shares of AMC an investor owns will be consolidated into one share with equivalent value.
Reverse stock splits are popular among companies with dwindling stock prices as a means to avoid delisting concerns associated with minimum bid prices maintained by both the New York Stock Exchange and Nasdaq Composite. While this will superficially raise the price of AMC shares, it won’t represent an increase in true par value.
Perhaps most controversial, however, is the company’s anticipated share expansion. While the fundraising effort reflects weakness in the company inherently, investors are more concerned with the resulting dilution of the stock issuance. Indeed, 99,540,641 shares of Class A common stock will be issued as part of the conversion of the 995,406,413 APE units (taking the reverse stock split into consideration). These shares will be added to the current roughly 520 million shares of AMC common stock, for a total share could of about 1.5 billion.
Investors’ concerns aren’t unmerited, either. It’s anticipated the share issuance will dilute current shares by roughly 90%, a major hit to long-term investors. As such, it should come as no surprise to see investors sell off AMC shares on news of the conversion’s legal approval. If you recall, AMC shares soared after Delaware Vice Chancellor Morgan Zurn blocked the conversion back in July, reflecting investors’ clear dismay with the initiative.
On the date of publication, Shrey Dua 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.