APE split: “Necessary, transformative & beneficial for AMC shareholders”

One of the most prominent market bears has provided a glowing endorsement of AMC Entertainment Holdings’ (NYSE: AMC) special dividend strategy – known as the APE split.

Under the plan, the shareholders of the world’s largest cinema company are receiving one AMC preferred equity unit (that will trade under the ticker APE) for each AMC stock they held at close of trading on Friday.

APE will begin trading on the New York Stock exchange from tomorrow (Monday), with the units set to begin appearing in shareholders brokerage accounts in the coming days.

When the move was announced on August 4, there was some initial investor enthusiasm, with AMC stock surging around 30% higher over the following week. However those gains were pared in the latter part of last week.

‘Last Bear Standing’ bullish on APE split

Despite the recent AMC share price fall ahead of the APE listing, one unlikely proponent of the APE split has emerged.

Prominent Substack newsletter, The Last Bear Standing, has built a cult following, with more than 70,000 Twitter followers. The the bearish author behind the newsletter writes in-depth, astute and insightful content, usually on why investors should batten down the hatches, buy puts and prepare for global economic collapse.

But the newsletter has now become an unlikely supporter of AMC Entertainment and its CEO, Adam Aron.

Labelling the APE split as “necessary, transformative and beneficial for shareholders”, The Last Bear Standing says to really understand AMC stock you need to disregard conventional financial wisdom.

What makes AMC so unique the Last Bear says, is the fact it trades on equity market valuations of 25x – 60x EBITDA, while being around 16x levered on a net debt/2022 EBITDA basis.

“This is what makes the situation so interesting. AMC is both an equity darling and a distressed credit. From the company’s perspective, its debt is very expensive and its equity is very cheap.

“According to your finance professor, this shouldn’t happen. Financial theory says debt should be cheaper than equity, because equity holders take on more risk and are subordinated to the debt.

AMC proves your finance professor wrong, and we know why… AMC’s debtholders are institutional credit investors concerned with downside risk, who see negative cashflow, massive leverage, and a long and uncertain return to profitability. Equity holders are different. They are largely individual investors who believe in the business and its management (or perhaps are simply trying to make money on the price volatility and are altogether indifferent to valuation).”

While usually companies would issue cheap debt to buy back equity, in AMC’s case it needs to issue cheap shares to buy back expensive debt.

However, market rules prevent AMC from issuing any more shares.

This is where the APE split helps.

The initial distribution of APEs to the common AMC shareholders has no economic impact. It is just a stock split that creates a new class of equity. But it is transformative because it allows the company to issue more equity in the future.

Critics were quick to point out the APE split was merely a way to get around the common share authorization limit and issue more equity. This is precisely the point. Far from “hiding the ball”, management has been upfront about their intention to raise additional equity via APEs.

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AMC Entertainment’s existential threat

While The AMC Entertainment APE split has been met with uncertainty and doubt over the impact of dilution on shareholders, this is misinformed according to the Last Bear.

“Since AMC’s equity today is much cheaper than its debt, we don’t even need to run numbers to know that issuing equity to repay debt would be accretive.

Hypothetically, let’s assume that AMC were able to issue $5.1 billion of new equity at current market prices to repay all of its debt.

To repay $5.1 billion, the company have to issue 261 million new shares at $23.67 per share, bringing the total shares outstanding to 732.9 million. The issuance would increase the common share count significantly. Existing shareholders would only own 70.5% of the common share class (down from 100%), but in the process, remove $5.1bn of debt that sits in front of them in the capital structure.

Screen Shot 2022 08 21 at 11.59.42 pm APE split
Image: The Last Bear Standing on SubStack

He also points out that the APE split debt reduction would be accretive for cashflows – eliminating some $341 million in annual interest expenses.

“AMC’s debt burden represents an existential threat to its common shareholders – far and away the biggest challenge to realizing long term value in the stock. Taking out the mountain of expensive secured debt that drains the company’s cash flow and sits in front of the equity is incredibly de-risking to shareholders, and removes the biggest challenge the company faces moving forward.”

… A strategic no-brainer according to one of the most prominent stock market bears.

You can subscribe to The Last Bear Standing on Substack here.

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