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AMC Stock Drop: Why AMC Stock’s Nose Dive After APE Unit Ruling Has Traders Talking
In premarket trading on Monday, AMC Entertainment’s shares fell 35% on concerns that the ratification of a revised stockholder settlement will allow the firm to issue more shares to generate money, diluting the value of each common share.
The common shares decreased to $3.45 in pre-bell trading. The price of “APE” preferred stock units, which trade at a substantial discount to common shares, increased by 27.5% to $2.27.
As part of the agreement, AMC will give common stockholders stock valued at an estimated $129 million in order to resolve any potential legal disputes relating to a stock conversion plan.
Three weeks after the judge rejected an earlier iteration of the settlement, it has now been approved.
The decision opens the door for the business to carry out its March-announced plan, which includes converting preferred share units into common stock, conducting a one-for-ten reverse share split, and possibly offering additional shares for sale as it works to reduce some of its $5.1 billion in debt.
Before the conversion and after the reverse split, Wedbush analysts predicted that the share prices of AMC and APE will converge at $3 and $30, respectively.
Wedbush analysts warned that if AMC were to substantially reduce all of its debt (via stock raising), it ran the danger of losing its shareholder base after diluting shares.
On Twitter, CEO Adam Aron referred to the decision as a “significant milestone” for the business and stated that the specifics and timetable for the conversion of “APE” units would be revealed on Monday.
AMC introduced preferred “APE” units as a special dividend last year in a tribute to retail investors who refer to themselves as “apes” on social media sites like Reddit and Twitter while the meme stock craze was in full swing in 2021.
According to Aron, the corporation has raised $418 million in cash over the last 12 months through the sale of “APE” units.
Some investors sued AMC earlier this year on the grounds that the firm was trying to thwart the will of shareholders of ordinary stock who objected to the company reducing their holdings.
The biggest chain of movie theaters in the world unexpectedly recorded a quarterly profit last week as movie theaters gradually recovered from their epidemic lows.
AMC Entertainment’s revised stockholder settlement was accepted by a Delaware judge on Friday, three weeks after the judge rejected a related arrangement by the theater operator.
The preferred stock of the corporation saw a 27% increase after the decision. The common stock of the corporation dropped 27%.
Investors have been informed by AMC that the company is burning through cash at an unsustainable rate and that the resolution will allow it to sell more shares and reduce some of its $5.1 billion in debt.
To resolve any legal claims relating to a stock conversion plan, AMC will give holders of its common shares equity valued at approximately $129 million as part of the approved class action settlement.
Shareholders are bound by the terms of the approved class settlement and were not given the option to withdraw.
A previous version of the settlement was rejected on July 21 by the same court, Delaware Vice Chancellor Morgan Zurn, because it also addressed possible claims by preferred shareholders who weren’t involved in the action.
The proposed settlement that Zurn approved on Friday did not include that clause.
Shareholders submitted more than 2,800 objections to the initial settlement, a level of interest that Zurn called “unprecedented.” A lot of those objectors requested authorization to withdraw from the settlement and bring their own lawsuits, calling AMC’s dismal financial forecasts “fear tactics.”
An opt-out, according to Zurn, is not practical and would be bad for the business and its shareholders.
For allegedly manipulating a shareholder vote that would have let AMC to convert preferred stock into common stock and issue hundreds of millions of new shares, the corporation was sued in February.
AMC allegedly devised the strategy to thwart the wishes of common stockholders who objected to the business diluting their interests, according to the investors who filed the lawsuit.
Common stockholders and preferred shareholders would possess 34.28% and 65.72% of AMC, respectively, in the absence of the proposed settlement. Common stockholders and preferred shareholders, respectively, would control 37.15% and 62.85% of the proposed settlement.
The Delaware Court of Chancery is hearing the matter, In re: AMC Entertainment Holdings Inc. Stockholder Litigation, No. 2023-0215.
