Shareholders of AMC Entertainment Holdings (AMC -2.00%) saw the price of their common stock plummet by 40% on Monday, but they received a share of the new AMC Preferred Share Units (MONKEY 4.13%) for every share of AMC common stock they held, more or less offsetting their setback. In total, investors ended the day with roughly the same value they started with.
However, there is more to the story. The deal-related dilution is delayed and follows a wave of dilution that many AMC shareholders may not even realize has taken place in the midst of the COVID-19 pandemic.
The rest of the story
The AMC theater chain issued 516.8 million newly minted preferred shares on Monday. Since the owners of the 516.8 million shares of common stock outstanding were the beneficiaries of these new preferred shares, existing shareholders have no less voting power now, and no less legal right to the assets. of the society.
The problem? AMC’s board of directors has authorized the creation of one billion of these new preferred shares. The remaining 483.2 million preferred shares will be reflected on the company’s balance sheet. In particular, they may be sold at any time in the future provided AMC follows proper filing and disclosures with the Securities and Exchange Commission.
By the way, there is the potential dilution of existing owners of this meme stock. Each preferred stock unit carries the same voting rights as a common stock, so there is now more than a third of total potential shareholder voting power sitting on AMC’s books, waiting to be be sold at some point in the future to the highest bidder. It’s also a bit more than dilutive in that these newly issued preferred shares take priority before common stockholders (but after bondholders) in the event of a bankruptcy liquidation. If things reach this dark point, however, common and preferred stocks are likely to lose almost all of their value – bondholders always come first.
A source of short-term cash
And make no mistake, the company will almost certainly sell those remaining 483.2 million preferred shares sooner or later, and likely sooner.
The official notification did not say as much. The written notice and explanation to existing shareholders only states: “AMC’s preferred stock units provide AMC with currency that can be used in the future to further strengthen our balance sheet, including reducing our debt and ‘other liabilities.’
Unofficially though, it seems much more likely than not that such a sale is already underway. CEO Adam Aron tweeted earlier this month when the company began creating this new share class, “This new AMC Preferred Equity allows AMC to raise equity, reduce debt and seek mergers and purchases.” It can only do one of these things if the company sells these newly created shares.
Aron is certainly no stranger to such tax maneuvers. The number of common shares outstanding has fallen from approximately 104 million before the COVID-19 pandemic took hold in the United States in early 2020 to the aforementioned 516.8 million common shares in the first quarter of this year. year. Most of the proceeds from those sales simply went to keep the theater chain afloat during a tough time. Not all of them, however. In March, AMC invested $28 million in a gold mining company Hydroft Mining. The company also picked up a few new theaters in the past few months.
Notably, AMC has not significantly reduced its long-term debt despite resuming normal operations this year. That burden still stands at just under $5.4 billion, down slightly from just over $5.4 billion at the end of last year.
If you haven’t already, you’ll be hearing a lot about these new preferred stock units. Some of these will be critical, pointing to the fact that the board did indeed find a way to issue shares after shareholders ultimately rejected the idea of creating more ordinary shares at the June shareholders’ meeting. . At the other end of the spectrum, some shareholders will be happy that Aron once again has plenty of cash to manage as he sees fit. The advantage (or disadvantage) lies somewhere in the middle of these two points of view.
The important reality is this: there are 483.2 million preferred shares waiting in the wings that will eventually dilute just over a billion common shares outstanding, or what might as well be ordinary shares. This is a clear disadvantage for current and future shareholders.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.