AMC Entertainment: Dilution, Dilution, And Even More Possible Dilution To Avoid Bankruptcy

Summary

• AMC raised $1.322 billion cash over the last few months.
• The total number of shares outstanding has risen from 109.3 million last August to 460.3 million currently.
• Investors seem to be ignoring the massive equity dilution.
• AMC continues to burn huge amounts of cash each month.
• Movie releases keep getting pushed out to later dates.

The timing of the recent stock market trading insanity rescued AMC Entertainment Holdings (NYSE:AMC) shareholders from being wiped out by a possible Ch.11 bankruptcy. There was a very real possibility a few months that AMC would be filing for bankruptcy in early 2021, but that is now not going to happen or at least not in the near future. The company was able to raise $1.322 billion by selling new shares and by borrowing additional money. The new reality facing shareholders is the extreme increase in dilution. The market either does not understand the dilution issue or it is ignoring the problem when pricing AMC stock. AMC is currently way over priced.

Current AMC A Shares Outstanding

There seems to be significant confusion over the current number of total AMC shares outstanding. This is how I am calculating the current number of A shares outstanding:

356,498,711-stated in a prospectus filing that assumed all 50 million shares would be sold in the offering, which were in fact sold.

Plus

44,422,860 from the conversion of the convertible secured debt by Silver Lake.

Plus

46,103,784 by Wanda converting their AMC B shares to AMC A shares, after subtracting 5,666,000 shares that were forfeited by Wanda when Silver Lake converted their debt to shares under a prior agreement.

Plus

13.3 million shares -from a press release indicating 63.3 million shares were sold, including shares sold under a prior offering (63.3 million-50 million=13.3 million) (13.3 million might be a rounded amount)

460,325,355 Total Class A AMC Shares Outstanding

No Class B AMC Shares Outstanding

Market Capitalization

Using 460.3 million shares and the latest AMC stock price of $5.60, the current market capitalization is $2.58 billion. FINRA's website shows $1.90 billion and 339.07 million shares. Seeking Alpha shows $2.09 billion capitalization. I do not think the media keeps track of shares outstanding in real time and they use prior reported figures.

The total number of shares has increased dramatically since August 3, 2020 when their 10-Q cover sheet reported 57,634,593 A shares and 51,769,784 B shares were outstanding (109,319,377 total).

To demonstrate the current irrational pricing of AMC shares, divide the current market capitalization of $2.58 billion by the 109.3 million shares outstanding in August 2020. The result is $23.60 per share. So the market is currently pricing AMC stock at an effective price/capitalization that last happened in June 2017 when AMC traded in the low $20's. Traders seem to be ignoring Covid-19, increased competition from internet movie providers, and increased debt in their valuations of AMC. Actually, I think many traders are completely irrational and are clueless about finance. Too many only pay attention to statements on social media when buying/selling stock.

Looking at the reality of the very dilution caused by issuing so many shares, you need to look at the dilutions impact on future earnings per share. Using $110 million annual net income, which is about the same as when AMC actually had net income (2018 $110.1 million, 2016 $111.7 million, and 2015 $103.9 million), and using third quarter 2020 average number of shares outstanding of 107.695 million, EPS would be $1.02. Using the same $110 million net income and the current number of shares outstanding of 460.3 million, EPS drops sharply to only $0.24. I am not forecasting net income of $110 million, I am only using that number as highest net income one could reasonably assert that AMC will earn to illustrate the impact of dilution.

Using those same EPS numbers and an EPS multiple of 14x, the stock prices for $1.04 would be $14.28 and for $0.24 it would be $3.36. Dilution has a very negative impact on the stock price. I am using a modest 14x because I think the increasing competitive pressure from other media platforms to view movies will have a negative impact on future multiples and the risk factor caused by company's very high financial leverage will put downward pressure on future multiples. The price of $3.36 is using a very unrealistically bullish future net income, in my opinion. Even using a somewhat bullish future net income of $55 million, the stock price would be only $1.68 or $2.40 using an unlikely 20x multiple.

Five Year AMC Price Chart

Source: Seeking Alpha

Raised $1.322 Billion Cash

AMC was able to raise $1.322 billion since December 10. This includes multiple stock offers totaling almost $811 million ($506 million issuing 164.7 million shares at an average price of $3.07 and $304.8 million issuing 63.3 million shares with an average price of $4.82). They also raised $100 million selling first lien debt to Mudrick Capital Management and raised $411 via a Euro revolving credit agreement. (Note: It is unclear when AMC would actually receive the $100 million. The parties entered into a commitment letter on December 10, but since interest payments were set for January 15 and July 15, I am assuming the effective date was in January.)

Their balance sheet was strengthened by Silver Lake converting their $600 million convertible secured notes into stock. Silver Lake then sold the shares for $713 million or about an average price of $16.0 per share. It is interesting to note that AMC did not issue new stock at those high levels. As stated above, AMC sold stock at an average of only $3.07 and in different offering at an average of $4.82. It is unclear if Wanda sold their Class A stock, but their filing indicated that Wanda converted their B shares for A shares "in order to permit sales of its common stock".

The conversion of Silver Lake's secured debt to equity reduced debt by $600 million, but the new $100 million 1lien debt and the new $411 million Euro revolving credit facility increased debt by $511 million. The net result was corporate borrowings were reduced by $89 million to $5.7148 billion (not including PIK any payments), but that still represents a $981.4 million increase in corporate borrowings from the end of 2019. There is also about $4.9 billion in operating lease liabilities. AMC still remains extremely leveraged both financially and operationally.

Cash Burn

The editors at Seeking Alpha wanted me to include an estimate of the company's cash burn rate to determine when they might run out of money in an article I wrote last September. I resisted because I thought it was almost impossible to estimate their future cash burn rate with any degree of accuracy. That is still a problem. According to a December 11 filing, AMC had "an average monthly cash burn rate of approximately $125.0 million during October and November". Using various reported numbers by AMC, they burned $123.6 million in December, which in the past was a very busy month for them. (These reported burn rates are much higher than my own "pencil" cash burn rate I had estimated in September for the rest of 2020.)

Since AMC was able to raise a significant amount of cash, I would expect landlords will be more aggressive in forcing AMC to pay full or almost full rents going forward. Prior negotiated rent concessions might also be renegotiated to reflect the AMC's new cash position. It is also unclear if some of these prior rent concessions were actual rent reductions or just deferrals of part of the rent until the movie business improved. My "pencil" cash burn rate until August is $115 million average per month. I am expecting continued high cash burn rates in early 2021 and somewhat improving rates during the rest of the year, which results in an average estimate for the seven months of $115 million per month. I am also expecting renegotiated rent concessions to have a negative impact on the monthly burn rate.

Using my estimated $115 million average burn rate per month for the first seven months of 2021, AMC is estimated to burn $805 million cash from December 31, when they reported a position of about $308 million cash. Using the $1.2104 billion cash raised (total of $1.322 billion minus the amount of new equity raised just during December of $111.6 million) and a total burn amount until August 1 of $805 million, AMC would have about $404.4 million cash in addition to the December $308 million cash position or $712.4 million total cash on August 1. Is that enough cash until movie operations return to a positive cash flow? If it is not enough cash, I would expect additional large new stock offerings, even at very low stock prices, which would make the dilution problem even worse. At this point, I can't even estimate a "pencil" burn rate past August.

Covid-19 and Movie Releases

There seems to be a trend that continues to separate the public's day to day activities from developments in the Covid-19 crisis. Just as people in Wyoming deal with 10 below temperatures and try to go about their normal activities, much of the public in the US has decided that they are just going to have to live their lives with the various issues associated with Covid-19 and make rational choices.

I do not, however, consider going to a movie theater during a pandemic as a rational choice. In a dark crowded movie theater you have no idea what type of people sit near you. A person a few rows back may cough/sneeze without following healthy protocols to prevent Covid-19 infected water droplets from spreading to people in front of them. Some people might assume that risk, but I think many will just watch movies on their large screen TVs at home instead.

I still don't think the general public understands what the effective rates of the two current vaccines in the US really mean. These two vaccines were tested to determine how effective they were to prevent moderate and severe Covid-19 symptoms. They were not tested to see if they prevent a person from being infected. Even now it is still unclear if either vaccine actually prevents infections/transmissions.

There is potential for increased spreading of the virus by those who received the vaccines, if the current vaccines don't actually prevent infections/transmissions, but only prevent symptoms. First, vaccinated people may ignore prevention guidelines, which could cause the spread of the virus. Second, if a vaccinated person does in fact get infected and does not show any symptoms because the vaccine stops the symptoms from developing, that person is much less likely to get tested/quarantine than if they showed symptoms, which again could cause more spreading of the virus.

Releases of major movies keep getting kicked further and further into the future or released on various media platforms instead of in movie theaters. There is major uncertainty even by movie industry insiders who have discussed the issues in various media publications. A January 29 article on the Box Office Pro website by Shawn Robbins gives a very interesting outlook for the movie industry this year. This is Robbins' forecast for the total US movie industry box office revenue for the first quarter 2021:

All told, based on current and very tentative modeling, the first three months of 2021 are pacing to generate an estimated $150 million at the domestic box office. That would be down from Q4 2020’s estimated $230 million and Q3 2020’s estimated $170 million.

The same article gives an indication of various future movie release dates, which keep changing.

Future Reported Numbers Could Be Misleading

Reported earnings/losses per share numbers are based on the average number of shares outstanding during the reporting period-not the current number of shares outstanding at the end of the reporting period. For example, because of the large increase in the number of AMC shares at the end of January after almost 1/3 of the quarter is over, the average number of shares outstanding will be less than the number of shares outstanding at the end of March.

Just for the sake of discussion, assume the losses for AMC are the same for the first quarter and second quarter 2021, the reported loss per share in the second quarter will be lower than the first quarter only because the average number of shares used to calculate that number has increased from the first quarter. I would not be surprised to see media reporters and AMC bulls asserting that because losses per share are lower in the second quarter compared to the first quarter that AMC operations are improving-an incorrect assertion.

AMC Unsecured Notes As A Potential Trade

While I am bearish on AMC and the movie theater industry, for investors who are bullish, buying unsecured AMC notes might be a more rational trade than buying AMC stock at current price levels. The yield to maturity on the 5.75%'25 unsecured notes is 29.24% (Note: yield to maturity assumes reinvestment of the coupon payments at the yield to maturity rate, which is most likely unrealistic.)

5.75% 6/15/25 Unsecured Notes CUSIP 00165AAH1

Source: FINRA website of Morningstar data

There are a number of AMC note issues which have very high yields to maturity and have soared off their lows from a few months ago. AMC stock price would have to rise sharply (almost 3x) over the next few years to beat the returns from these notes at current prices. The notes benefitted from all the new cash from the issuance of additional shares, which made bankruptcy less likely in the immediate future. Noteholders also do not have to worry about equity dilution from the large increase in the number of shares.

Conclusion

I am both bearish on the economy this year and on AMC. Personally, I have no plans to go to see a movie in a theater ever again. My large TVs are just fine to watch movies. Until there are significant enough vaccinations using vaccines that prevent getting infected/transmissions. not just preventing symptoms, to achieve herd immunity, I think the movie theater industry will face a very difficult future.

AMC got very lucky. Shareholders seem to be ignoring the extreme dilution caused by the large increase in the number of shares outstanding. Even if AMC is able to manage a turnaround, EPS will be very low because of the dilution. These low earnings means low AMC stock price. I, therefore, rate AMC common stock a sell.

Analyst’s Disclosure: I am/we are short AMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[dkeat]

How much did you lose on this trade, it was at $5.70 when you wrote this. Just for transparency.

[Alex Hardman]

@dkeat I think he established a short around $14 or so, most likely at least that position has proved out profitable for him. He posted a comment on March 15th, that he was going to establish a position, which is the recent high since the article was written.

[Mitek]

@dkeat Transparency :)) almost nobody is transparent about their losses, unless obligated under some law .

[Bserpent77]

So he admits to breaking the law. Citadel is flooding the market with shares that don't exist. Shares issued by AMC have all been sold. What they are doing is using the stock lending programs on RobinHood and Webull to create these fake shares, sell them to RobinHood and Webull's clients KNOWING THAT THEY ARE INTENTIONALLY BANKRUPTING THE COMPANY. If this author is shorting AMC now, he is complicit is this criminal behavior. He is BORROWING fake shares and selling FAKE SHARES. I am taking names of every "journalist" involved writing up my criminal complaint for the F.B.I

[Trader Joey]

Oof. This didn't age well.

[Alex Hardman]

@Trader Joey WYCO wasn't saying one can't make money trading this stock, clearly it is very volatile and a lot can be made from calling the swings in price correctly. His argument is more along the lines if you are looking to buy and hold this security for a year or so plus, you probably will lose money in the long run. He tends to write several articles with the intent to act as a warning to investors that might have missed some of the details. In this case, the massive dilution that has taken place at AMC, which while good for creditors, might not be so great for shareholders long term.

He also waited until the March 15th to initiate a short on the stock, but didn't short it when he wrote the article. Which is probably his way of saying, "Ok, now the price is ridiculous." And so far, that day has been the high point since he wrote the article.

[parity]

@Alex Hardman I think he also shorted a few weeks or months before this article was written and then he also said in a follow up that he covered at around $2 or so before all this meme mania. Then you have the post below on Mar 15 that he is planning to short again. The meme runup definitely saved AMC from BK so a lot of people were wrong. These are not normal markets so almost anything is possible. Ironically, I was looking at AMC as the meme craze developed and saw what Hertz could have been if only Hertz had an ATM already filed or had the guts to play the game with the SEC to file a new one at the time. All companies should have an ATM ready in this market. Lol, we can do ATMs too.... I would advise everyone place limit sell orders at crazy higher stock prices for their own random positions. You never know when your stock can be meme'd.

[Alex Hardman]

@parity I completely agree, all companies should have ATMs and stock buybacks ready to go so whenever prices bounce to one or the other extreme, they can take advantage of the situation without first having to signal their intention allowing everyone to front run them.

The more precise point of my previous comment is, there is a big difference between investing and trading. And Wyco was focused on the investors with this article, not the traders.

[WYCO Researcher]

I am expecting short AMC this morning-easy to borrow.

[parity]

@WYCO Researcher Good luck. Looks like it is running up higher short term on stimulus money pump.

[parity]

Company is awfully quiet in last few weeks. I wonder why they have not declared a new filing for ATM or block raise. Could it be to allow Wanda to sell off their stake first?

[turner75024]

When people sell a bunch of call options that unexpectedly end up in the money, the underlying fundamentals of the business don’t matter.

[rcorbi]

“In a dark crowded movie theater” that’s a very bearish way to put it. I think the problem is when people are bearish against a company and write an article, they tend to lose site of why they’re writing and focus on their personal feelings. Rightfully so, if you’re bearish you want the stock to plummet so you can make out just like the hedge funds! On the other hand though, I believe a person should give the pros and cons whether bearish or bullish. It’s as if you’re forming a cult like community and only giving one view: bearish! No pros only cons. I myself love to go to the movies, always have and will continue. People that join me on going haven’t changed their mind either. Did you also notice when China recently opened IMAX back up they were fully booked? Why can’t you expect the same for AMC? Oh that’s right, you want them to fail. It’s pretty sad that if I were a business owner and fell on hard times during covid my peers would be sidelining for me to fail. No words of wisdom, no encouragement, just flop! I’ll revisit you when the turnaround of this company happens!

[jamoi]

you are only partially right.

1. The company is not going bankrupt.
2. Cinemas are coming full because you can’t get anywhere else.
3. the loans have been partially converted into shares, ie the loans are reduced.
4. 100% sure that at least here in the Nordic countries the company will be forgiven of debts when the covid ends, because here are the cinemas the only ones that have closed.
5. In the Nordic countries, people have started buying movie tickets even though they don’t know when to even get to the movies .. support the company.
6. Here the government will support companies for which covid causes harm.

I’m not a stock owner, just a side follower, but I support stock owners mentally and I don’t understand short sellers why they are trying to take advantage of the company’s predicament, which is not due to them themselves.
support for the company’s employees as well.

[wetdoginvest]

I love it "FINRA's website shows $1.90 billion and 339.07 million shares"... lmao! And the regulators are sniffing around trying to figure out what is wrong with the market.

[AJames2123]

What a garbage hit piece!

[Ed Grey]

@AJames2123 What a useless comment! Are people going to start returning in droves to the movies?

Why is AMC more than a medium-term short or a day-trade on its volatility?

[AJames2123]

@Ed Grey Okay, okay! Just don't delete your comment; and we will come back to reevaluate our comments this summer. In the meantime, have a good life.

[GR Value]

@Ed Grey They could return higher than droves and AMC will still post a heavy loss. That's why buying AMC to hold makes no sense. It's for people who want to gamble. Why it's above $1 is a mystery.

[Evan Buck]

March 26 $9 puts going to print money on this once the WSB 2.0 pop fades. Nabbed a couple puts this morning

[Mitek]

@Evan Buck good luck buddy. I bought 2 tickets to see Nomadland in AMC :)

[Ed Grey]

@Evan Buck That's a bit shorter term than I like to go. With puts that expire in 2023, you get a huge amount of time value for not that much extra cost.

[Trader Joey]

@Evan Buck oof. This comment didn't age well.

[Pacifica Yield]

"Even now it is still unclear if either vaccine actually prevents infections/transmissions."

How is this even remotely objective analysis? Such an epic reach that could have taken 5 minutes to disprove.

www.bloomberg.com/...

[Mitek]

@Winds Research I am from Israel and this is true !

[Ed Grey]

@Winds Research Because it's as easy in the USA as it is in a tiny country to inoculate the whole population quickly? And it's as easy to restrict travel, etc.?

What happens when NY says, "Uh oh, I guess it wasn't a good idea to open the theaters when mutant strains are starting up"?

[Ed Grey]

@Xterm2000 Yes, it's true. In Israel. The USA is a different story, and different from region to region.

In Israel, are people going to the movies now?

Maybe in the USA, there's a bull case for a new drive-in movie chain this spring? That might work even if few new movies are released for a while.

[Mike Kendall]

amc is BULLISH lets go monkeys Hold its about to pop off. bears in your shorts will you stop getting scared and angry that your thesis is wrong

[GR Value]

@Mike Kendall Well for now it appears logic means nothing again as AMC is now at 4.6 billion market cap at $10, or over 7 times the pre-covid market cap. And they lost 3 billion since then and can't ever make a profit again.

Looks like an event to redistribute shares that Dalian Wanda and Silver Lake sold. As usual, I would sell this and any rally, before it hit $1 or under within a year.

[Andrew Samalin]

@GR Value Can you provide the math relating to "7x the pre-covid market cap"? Thanks much-

[finance_engineer]

@Andrew Samalin Outstanding shares have been diluted. Number of shares pre-covid was 104M. There are 339M outstanding shares now.

Market Cap early Feb 2020 was ~0.65B.
0.65B * 7 = 4.55B.

If AMC is at $11 now, its precovid price would be ~$36.

It's ludicrous, but I bought shares this week to hedge my puts. Glad I did.

[Kingdom Capital]

Will be right eventually once the post-Covid weakness becomes clear. Not enough retail bagholders to keep it afloat forever. Nice work.

[rcorbi]

@Kingdom Capital I wouldn’t be so sure about that 😏

[Kingdom Capital]

@rcorbi do you think AMC with more debt, less assets and a constant cash burn is worth more than 2x the enterprise value it was before Covid? Cmon man.

[trentbridge]

What if Amazon or Netflix want to buy? They may view a cinema chain as an attractive option to showcase their numerous movie offerings. Not everyone can afford to subscribe to both for home-based viewing.

[bazooooka]

Tail wags the dog on this one. Options market can move the stock. When this ends it'll be a good short, albeit a dangerous one since its a WSB reddit favorite.

[GR Value]

@bazooooka I would never short but I totally agree with that assessment. The options market is helping to drive the mispricing. Gamblers in longer dated calls are causing a undeserved premium. In a rational world, AMC would be $1s. Maybe it can be traded to $10 again for another pump and dump I have no clue. If those calls sell and open interest wanes, lookout.

[Cannot post]

@GR Value

In an otherwise rational world, how many technology stocks could be remotely as high as it stands now? Tesla vs GM likes? People are betting that amc won’t go BK especially after the late saga. While highly speculative play for me, I am glad to participate in for its long term survival and prosperity because my guts tell me that as the cheapest entertainment destination cinema cannot die with a flu-like virus no matter its name. It creates value and deserves a place in the post covid world. Long amc.

[GD062XX]

Run. Run! Run!! ROFL.

[rcorbi]

@danforthgs to the movies!

[paul13]

HOW ARE PEOPLE BUYING THIS??? OPK EARNINGS DOUBLED AND THE STOCK WENT LOWER...THIS STOCK IS WORTH 2 BUCKS AND IT GOES HIGHER SMH...

[ebizmedia]

@paul13

You just drink a Red Bull or something? Calm down......

[terrell8167]

@paul13 Dude just invest in a better company, OPK has been trash for YEARS haha

[rcorbi]

@paul13 a stock is worth what shareholders believe in!

[ebizmedia]

Just for those reading....so you know what you're getting into, here's this bloggers sell rating on TipRanks for AMC.

AMC Entertainment AMC - Average Profit On Stock = -19.2%

Chart Of Results If You Would Of Listened To This Guy: snipboard.io/...

You can verify the results here: www.tipranks.com/...

Looks like he's not going to give you an update on when to get out of this one so you're on your own. Don't be a bag holder. Profit responsibly kids!

[Obo521]

@wyco researcher - thinking about AMCs Q4 report...with all of the secondary offerings and dilution, won’t the negative EPS be spread across more shares? With the risk being that dilution falls on deaf ears as the negative EPS number is interpreted as an earnings beat? I.e. only -.02 per share vs. -.80 per share or whatever current analyst estimates are.

[Jimmy Carter]

@Obo521hilarious possibility

[Obo521]

@Chancroid considering closing out short and flipping long over this. I don’t see a downside catalyst to push it

[ebizmedia]

@Obo521

It's telling that the price hasn't dropped yet (bears at SA predicted dilution would bring this to $3 fast) - what is it waiting for? That's the question you need to answer......

I'm no financial genius like the author who wrote this article claims to be but you can take a look at recent institutional buyer activity here: https://fintel.io/sob/us/amc

There's an earnings report coming (this week) and the covid re-opening outlook is looking shockingly good right now.

Don't forget - this is the current share price with NY AND CA theaters closed for business still and zero new movie releases scheduled.

Still haven't heard anything about what they're doing about the landlord situation - there might be good news there.

Lots of bad things still in play of course. The debt hasn't changed by much (or did it?)

I mean all the flea market accountants here at SA are using the 2019 figures as gospel and making grand predictions based on these. If 2020 was unexpectedly bad then what's to figure that 2021 couldn't be unexpectedly good?

That's a pretty big unknown to be betting short on.

I am not a financial advisor. This is all my personal opinion.