AMC stock: Is the cinema chain a takeover target?

Key takeaways

• Speculation circling that Amazon could launch a takeover bid for AMC
• The news is also providing much-needed support to bankrupt Cineworld
• Rationale for a deal holds water, but not at current valuations
• We believe a takeover of AMC is unlikely given its bloated valuation and burdensome debt
• AMC’s valuation will be tested over the next month as investors wait to find out whether it can go ahead with its APE conversion plan

Will Amazon buy AMC Entertainment?

Amazon is considering launching a takeover bid for AMC Entertainment, according to The Intersect, as it looks to snap up the cinema chain’s 600 theatres to push its Amazon Prime content and boost marketing efforts.

The report, citing unnamed sources, says Amazon has been considering making an acquisition in the cinema space since as far back as 2006, when it first launched its Amazon Prime Video service. At this stage, only internal discussions are being held, suggesting AMC is not aware of any possible bid and that no offer is guaranteed.

The news sent AMC shares up over 13%, giving the theatre chain a valuation of around $2.7 billion. That is small change for Amazon, but we believe a takeover looks highly unlikely at this level. Amazon has a better chance biding its time and waiting for AMC’s value to fall considering it remains in a challenging position.

It is worth remembering that this isn’t the first time AMC shares have popped on speculation of an impending takeover from Amazon before, only to fall back after nothing materialized.

The rationale for Amazon entering the cinema space holds water. The company is ramping-up spending on content as the steaming wars heat up and it would give it direct control over theatre releases, which could also give it the edge over rivals like Disney as they continue to release blockbuster hits on the big screen. The Intersect report suggests Amazon is preparing to release up to 15 films for cinemas each year.

With this in mind, markets should keep an eye on Cineworld…

Keep an eye on the Cineworld share price

Wedbush said it was unlikely that Amazon would take the plunge for AMC, stating it would be ‘better off buying a piece of Cineworld’, which has already succumbed to the tough operating environment after going bankrupt last year.

Cineworld shares in London have popped on that comment, although it still remains a shadow of its former self.

Cineworld has faced many of the same problems as AMC, such as a slow recovery in audience numbers since the pandemic and being saddled with too much debt. As a result, Cineworld has the for sale sign up, is in an even more distressed position and comes with a much lower price tag considering its valuation, down 88% since hitting trouble last year, sits at just £35 million. Plus, Cineworld has more reach given it is the world’s largest cinema chain with 751 theatres across 10 countries.

Is AMC a takeover target?

We believe there is little chance that AMC can find a buyer right now considering its bloated valuation, slow recovery from the pandemic and excessive debt levels. The company has warned it will take several years for audience numbers to return to pre-pandemic levels, which is causing it to burn through cash at a time when it is struggling to raise equity and discouraged to take on more debt considering it has $4.9 billion on its books already.

AMC stock: Will the APEs be set free?

This is especially true as AMC’s valuation will be tested by the upcoming hearing that will ultimately decide the fate of its plan to raise cash by issuing APE preferred shares.

AMC raised a large amount of equity when it became cash-strapped after being shutdown by lockdown restrictions during the pandemic, which is why it has managed to survive longer than Cineworld, which couldn’t conjure up the same excitement among retail investors.

However, AMC hit a brick wall when it wasn’t allowed to issue more shares because it struggled to get its horde of retail investors, which are thought to own around 80% of the company, to vote on proposals to increase the cap.

It therefore had to get creative. It couldn’t issue more common shares, but AMC could issue what are known as preferred equity units, which it listed under their own ticker of APE. The charter that dictates the rules were much looser for these preferred equity units and it meant AMC could raise more cash without having to secure approval from investors.

As a result, AMC said buyers of APE preferred shares would be given equal rights as common shareholders. APE shareholders have the same voting and economic rights as those holding AMC shares, and the company has always made it clear that it eventually aims to convert APE shares into AMC shares.

The problem AMC has faced is that there has been a huge difference in price between AMC shares and APE shares, with the latter trading at a huge discount to the former because the risks attached to the conversion plan has led to the preferred stock lagging.

‘Clearly, the existence of APEs has been achieving exactly their intended purposes. They have let AMC raise much welcomed cash, reduce debt and in so doing deleverage our balance sheet and allow us to explore possible M&A activity. However, given the consistent trading discount that we are routinely seeing in the price of APE units compared to AMC common shares, we believe it is in the best interests of our shareholders for us to simplify our capital structure, thereby eliminating the discount that has been applied to the APE units in the market,’ said CEO Adam Aron.

That has caused problems because it means you can buy an APE share – with all the same rights as an ordinary AMC share – at a massive discount. That is dilutive for AMC shareholders.

Plus, while the first bunch of APE shares were issued as a form of special dividend, akin to a stock split, to existing holders of AMC shares last year (thereby avoiding dilution), it has since started selling APE shares to new investors, such as Antara Capital, which means AMC shareholders will be further diluted if APE shares are converted into common stock.

Watch AMC stock ahead of hearing on April 27

Although shareholders approved the APE conversion plan this month, alongside a reverse stock split at a 1:10 ratio, AMC cannot complete the plan because some investors are blocking it. A lawsuit led by Allegheny County Employees' Retirement System is accusing AMC of ‘breaching their fiduciary duties by carrying out a strategy to dilute the voting power of AMC’s Class A stockholders’. It claims the plan is designed to dilute existing shareholders and destroy their voting power. As a result, the court have told AMC it cannot complete the plan until it has resolved the matter at a hearing pencilled-in on April 27.

The move has threatened AMC’s plans and has not helped the discount being applied to APE shares, which would be deemed invalid if the court case goes against AMC. However, analysts believe there is little chance that the court will block the plan considering the support shown by other investors in favour of the proposals at the recent special meeting.

What does this mean for AMC and APE stock?

The green light to convert APE shares into AMC shares would be bittersweet for investors. On the one hand, it will pave the way for AMC to continue raising fresh cash to fuel its recovery and deleverage its balance sheet, ultimately installing confidence that it can weather the storm. On the other, it will significantly dilute their holdings as new investors such as Antara have their APE holdings turned into AMC stock. The prices of AMC and APE shares should converge. 

It could be disastrous for AMC in the unlikely scenario that disgruntled shareholders win their court case. APE shares could be wiped out if they are deemed invalid and this would cut off AMC’s ability to raise fresh cash. However, it could lift some of the weight off AMC shares as the threat of dilution disappears if investors don’t lose their nerves over its fragile financial position.

Regardless, the event will be a test of AMC’s valuation and the hearing will be a big day for investors. Any company that is considering pulling the trigger on a takeover will wait to see how things play out considering risks are firmly geared toward the downside.

Where next for AMC stock?

AMC shares popped higher as speculation of a takeover erupted yesterday but it has quickly come up against some resistance after climbing to a two-week high.

The stock could recapture both the 50-day and 100-day moving averages if it can keep up the momentum before eyeing the longer-term moving average. Notably, the 200-day moving average is aligned with the falling trendline that can be traced back to September and could introduce more resistance. IF it can get over that hurdle, then the $8.17 ceiling that has held on numerous occasions over the past four months is the next major level that needs to be recaptured.

On the downside, AMC shares could sink toward the last trough of $4.18 but the two-year closing-low of $3.85 remains on the radar. Any drop below here could see the stock sink below $3.40.

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