11/29/22, 12:36 PM
Final Curtain - Doomberg
Final Curtain
Doomberg
Nov 26
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“Everything being a constant carnival, there is no carnival left.” – Victor Hugo
In the 1985 comedy classic Lost in America, Albert Brooks and Julie Hagerty play David
and Linda Howard, an upper-middle-class couple barely keeping up with the Joneses in
Los Angeles. When David gets passed over for a promotion at work and lashes out at his
boss, he finds himself out of a job. After convincing Linda to quit hers, the couple
liquidates their assets, purchases a Winnebago, and leaves the City of Angels in search
of a new beginning.
All is well until the couple rolls into the Desert Inn Casino in Las Vegas. As it turns out,
Linda has a secret gambling problem, something David discovers after waking up alone
in bed. He eventually finds his exhausted and agitated wife at the roulette wheel where
she has been feverishly gambling away the couple’s savings throughout the night.
Unluckily for the Howards, she lost it all.
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On a streak - just not a hot one | Lost in America
In the most memorable scene of the movie, David begs the casino manager – played by
actor Garry Marshall in a brilliant cameo appearance – to return the couple’s nest egg.
Marshall’s character looks on with an incredulous stare as David pitches a scenario in
which returning the Howard’s money could be spun as a marketing coup, suggesting the
quaint slogan “The Desert Inn Has Heart.” You can probably guess how it went.
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Sometimes you just have to take the L | Lost in America
Much like The Desert Inn, Wall Street is designed to separate punters from their capital.
As the Everything Bubble™ continues to deflate, legions of gamblers find themselves
wishing they left the casino much earlier, working their way through the stages of grief,
and no longer ridiculing those who avoided the tables altogether on the way up.
As longtime readers of Doomberg will know, we’ve been fascinated by the saga of AMC
Entertainment Holdings (AMC) from our earliest days, a situation we first wrote about
back in August of 2021. As this symbol of speculative excess stumbles toward what
appears to be an inevitable bankruptcy filing, the script has taken a turn for the absurd,
delivering one of the most bizarre situations in the history of the US capital markets.
Not satisfied with having already evaporated billions in retail investor cash in service of
the well-heeled owners of the company’s debt, AMC CEO Adam Aron is continuing to
suck every last penny from the coffers of the very supporters who have kept his
chronically injured company afloat much longer than underlying fundamentals would
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have justified. With the climax seemingly behind us and resolution fast approaching, it’s
time we took another look at AMC. Let’s dig in.
As we recently described in a piece called A Very Special Dividend, AMC desperately
needs to raise cash but the debt markets are effectively closed to the company.
Additionally, its shareholders have explicitly forbidden Aron from issuing new shares of
AMC common stock. To circumvent this rather unfortunate constraint, the company
announced in August that it would issue a special dividend of preferred equity units to
each of its shareholders. These units now trade on the stock exchange under the symbol
APE. The move essentially amounted to a 2-for-1 stock split, with a catch: while each
shareholder on record would own an equal number of shares of AMC and APE postsplit, the company is unhindered in its ability to issue new APE shares to raise capital.
AMC and APE represent equivalent economic claims on the company’s future – in all the
ways that matter, they share identical seniority in the capital table – and yet they trade
as separate securities on the stock exchange. The move amounted to a casino deciding to
have two types of $10 chips, one blue and one blue2, but with no other differences
between them (they both spend equally well at the roulette wheel). The securities are so
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similar that the company consolidates them in their public filings to calculate “per share”
performance. Here’s a quote from their most recent 10-Q (emphasis added throughout):
“Each AMC Preferred Equity Unit is designed to have the same economic and voting
rights as a share of Class A common stock. Trading of the AMC Preferred Equity Units on
the NYSE began on August 22, 2022 under the ticker symbol ‘APE.’ Due to the
characteristics of the AMC Preferred Equity Units, the special dividend had the effect of a
stock split pursuant to ASC 505-20-25-4. Accordingly, all references made to share, per
share, or common share amounts in the accompanying consolidated financial statements
and applicable disclosures include Class A common stock and AMC Preferred Equity Units
and have been retroactively adjusted to reflect the effects of the special dividend as a stock
split.”
Despite being functionally the same security, APE has traded at a huge discount to its
twin from the onset, a puzzling situation that would seem to nullify the Efficient
Markets Hypothesis. At the time of this writing, APE is trading hands for less than onesixth of the price of AMC – buying AMC stock over the APE preferred in the market
today is the equivalent of handing our imaginary casino’s cashier $10 for a blue chip
when blue2 chips can be had for $1.50.
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The net effect of this significant price difference is that for each dollar raised by selling
newly minted shares of APE, holders of AMC common stock will see their economic
claims substantially more diluted than if they had simply allowed Aron to issue more
shares of AMC directly. Not that Aron cares – he will take fresh capital from wherever
he can get it until the taps truly run dry. The company entered into an at-the-market
offering agreement with Citigroup on September 26 to peddle as many as 425 million
new shares of APE at whatever the price, and in the last five trading days of the quarter
he hammered the bid:
“Amid an earnings report that noted another quarterly loss despite increased revenue, for
which the AMC CEO partially blamed a lack of high-performing theatrical releases, AMC
reported that its controversial ‘at the market’ equity program had resulted in [the sale of]
14.9 million shares of its “Preferred Equity Units” since September 2022.
AMC activated pre-existing shareholder approval months ago to issue preferred equity units,
known as APEs. The plan was to issue 425 million such APEs and use proceeds to pay down
some of its $5.5 billion in debt. The Preferred Equity Units (NYSE: APE) have raised just
$36.4 million in net proceeds.”
Aron has since sold even more APE shares at substantially lower prices. According to
the “Subsequent Events” section of AMC’s most recent quarterly filing (dated November
8 and linked above), no bid is too low:
“As part of the Equity Distribution Agreement described in Note 7—Stockholders’ Equity,
the Company raised gross proceeds of approximately $28.0 million through the date of this
filing through its at-the-market offering of approximately 12.2 million shares of its AMC
Preferred Equity Units and paid fees to the Sales Agent of approximately $0.7 million.”
Despite APE approaching the woefully low price of $1 a share while AMC fetches more
than $7, there are signs that Aron is still flinging as many new shares of APE into the
market as he can. On the day before Thanksgiving – a day normally characterized by low
volumes and therefore high volatility – a most curious “leak” revealing Amazon’s plans
for a future movie business crossed the wires:
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“Amazon.com Inc. plans to spend more than $1 billion a year to produce movies that it will
release in theaters, according to people familiar with the company’s plans, the largest
commitment to cinemas by an internet company.
The world’s largest online retailer aims to make between 12 and 15 movies annually that will
get a theatrical release, said the people, who asked not to be identified because the company
is still sorting through its strategy. Amazon will release a smaller number of films in
theaters next year and increase its output over time. That number of releases puts it on a
par with major studios such as Paramount Pictures.”
While shares of AMC traded as much as 11% higher on the “news,” shares of APE traded
down most of the day and closed 4% lower. There seemed to be a consistent seller of
APE throughout the trading session, until the last 30 minutes, and one can’t help but
speculate whether the source of the leak was the same entity doing the selling.
Do any of these shenanigans alter the fate of AMC as it spirals toward a likely
bankruptcy? Not according to the debt markets. AMC’s 10% coupon 2nd lien bonds due
in 2026 – which sit behind nearly $3.4 billion in 1st lien debt on the company’s capital
table but well ahead of both the AMC and APE equity claims – are trading hands at
roughly 36 cents on the dollar. This implies a yield to maturity of ~50%, but in reality,
bonds trading at these distressed levels are indicating what the market expects to recover
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in bankruptcy more than anything else. These quotes from A Very Special Dividend have
aged well:
“The real impact of the move will be to keep the money train flowing from retail investors to
bondholders and management insiders for as long as possible. The company is paying
approximately $380 million a year in interest payments to its debt investors, expenses that
could be mostly wiped away in a bankruptcy filing and used instead to invest in the business
itself….
….When the enthusiasm of retail investors inevitably dries up, and the company is truly of out
tricks, it will still be a broken enterprise with too much debt. In the event it declares
bankruptcy, bondholders will own the new company that emerges, and management will get
fresh compensation plans to stick around. Existing shareholders (including the many future
owners of the APE preferreds) will almost certainly be zeroed out.”
And the company’s cash position? Over the past five quarters, AMC’s cash balance has
shrunk by an average of $225 million per quarter. It sat at $685 million as of September
30. Although Q4 is seasonally their strongest, the box office numbers this year look
anemic thus far, running at 67% of 2019 and slightly below last year.
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The new Avatar movie, set to release in mid-December, is the big end-of-year bet, but
after the holiday frenzy winds down, the reality of a typically slow Q1 will set in. AMC's
cash balance dropped by $425 million in Q1 2021 reflecting movie-goers resistance to
leaving the comfort of their couch in the dead of winter.
The casino is no place to gamble money one can’t afford to lose. The house always wins,
and all that jazz.
Having squandered their financial independence at the roulette table, David and Linda
Howard take jobs they would have considered well beneath them before their ill-fated
adventure. Eventually, David convinces his old firm to hire him back (at a discount, no
less).
We suspect many of AMC’s supporters in the retail class will be similarly humbled in
the months ahead.
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58 Comments
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Write a comment…
Ken 16 hr ago
A better comedic reenactment of this situation might be the business model for the play
being put on in The Producers.
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Tankster Writes Tankster’s Newsletter Nov 27
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Don't ever say "nest" and "egg" together again...
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