AMC APE Stock: Massive Dilution Downside Still Possible

Back in early November, I told investors to sell what they owned of AMC Preferred Units (APE). This stock had fallen considerably already as movie theater giant AMC Entertainment (AMC) was in a very precarious spot regarding its financial situation. As the year comes to a close, APE units have dropped to a new low, yet there is still room for plenty of downside if the theater business doesn’t improve meaningfully in 2023.

I mentioned back in August that the company likely needed a capital raise, and that process started with AMC management deciding to use a preferred share class to raise funds. As a reminder, there currently are 1 billion preferred units authorized, but also 4 billion more could be eventually authorized by the board. At the end of Q3, AMC reported about 519.5 million APE units outstanding, so there has been the potential for the number outstanding to surge several times over.

On Monday, AMC management issued a press release to update investors on the company’s current financial situation. During Q4 2022 to date, AMC has raised approximately $153.2 million of gross cash proceeds before fees and commissions through the sale of 123.2 million AMC Preferred Equity Units. That’s nearly 24% dilution in less than three months already, and APE units have lost about half of their value since my previous article.

The big problem for AMC here is that its financial situation is only getting worse, despite raising over $150 million so far during Q4. In the press release, management stated that it expects to finish this month with total liquidity of $725 million to $825 million, which includes $211.2 million of undrawn capacity under the Company’s revolving credit facility. However, at the end of September, total liquidity was around $896 million. The only small good piece of news here is the debt repurchases that management has detailed:

During the fourth quarter of 2022, AMC used a portion of the net proceeds from its ATM to repurchase approximately $30.7 million principal amount of its 10% Second Lien Debt due 2026 at an average discount of approximately 60% and approximately $5.25 million principal amount of its 6.125% Senior Subordinated Notes due 2027 at an average discount of 70%.

These debt moves will slightly lower the company’s interest expenses, but it’s really a drop in the bucket with more than $5 billion in total debt on the books. When thinking about the above statement regarding liquidity, AMC could finish this year with less than $600 million in total cash. That’s not a great place to be at considering how much worse the balance sheet has gotten in recent quarters as detailed in the table below. Dollar values are in millions.

AMC doesn’t have any major debts coming due in the short term, but a large negative working capital balance implies you have a bunch of other bills outstanding that you need to pay back. Thus, unless some lender out there is willing to allow the company to borrow a good chunk of change, which would come at a very high interest rate, the likely way to raise capital here is to continue selling APE units into the market.

The problem for AMC is that the APE units are currently trading below 70 cents, so every dollar being raised now means about double the amount of units that needed to be sold as in early November. It’s also possible that a reverse split occurs at some point to get the units back up to a price where you don’t need to sell as many numerical units to raise all this capital, but that’s up to the board of directors.

For AMC, the next couple of weeks will be rather interesting. The new Avatar movie got off to a sluggish start, with grosses of $134 million, falling a bit short of expectations for at least $150 million. The Christmas weekend is usually good for the theaters, but the domestic box office is still likely to fall several hundred million short of what it did in Q3 2022, where AMC’s quarter was not very good.

In the end, there is likely to be a lot more downside for APE units as AMC’s financial picture has worsened in recent months. The company announced on Monday a bit of dilution already this quarter, and yet the cash balance is still dropping at an alarming rate. With APE units hitting a new low under 70 cents now, the dilution will pile up even faster as management looks to shore up a very troubled balance sheet, and it doesn’t help sentiment that the Avatar sequel got off to a slow start this weekend.