AMC Entertainment (NYSE:AMC) stock is plunging lower after Delaware’s Chancery Court lifted the status quo order on AMC, allowing the company to convert AMC Preferred Equity Units (NYSE:APE) into AMC, effect a 1-for-10 reverse split and to increase AMC shares outstanding to 550 million from 524.17 million. The reverse split and increase in authorized shares will become effective on Aug. 24. These two actions will open the door for an APE to AMC conversion.
A total of 99.54 million shares of AMC will be issued as part of the conversion, which is based on 995.40 million shares of APE outstanding as of June 30. AMC disclosed that it expects APE to cease trading on Aug. 25, which will be followed by its delisting from the New York Stock Exchange.
Dear AMC Stock Fans, Mark Your Calendars for Aug. 24
AMC will also provide a litigation settlement payment to applicable shareholders as of Aug. 24. On a pre-reverse split basis, shareholders will receive 10 shares of AMC for every 75 shares owned. AMC believes it will issue 6.92 million shares as part of the settlement payment. After the reverse split, conversion and payment, there will be 158.38 million shares of AMC stock outstanding.
The main problem for shareholders here is dilution. Wedbush believes the prices of both AMC and APE will converge to the $3 area before the reverse split, although shareholders could be harmed in the process.
“Should AMC remove substantially all of its debt (through equity raises), it runs the risk of losing its shareholder base after diluting shares,” said analysts at Wedbush.
Following the courts decision to lift the status quo order, CEO Adam Aron released a letter to shareholders:
— Adam Aron (@CEOAdam) August 14, 2023
In the letter, Aron praises the court’s decision and writes that it will make AMC a stronger company. He adds that the conversion will result in a single price for AMC, which “eliminates the unnecessarily higher dilution caused by the lower market price of APE units.”
The CEO also explains that dilution is key to the company raising capital and is not always a mistake. In the past 12 months, AMC has raised $418 million through the sale of APE units, compared to its June 30 cash on hand balance of $435 million.
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.