AMC Entertainment plunges 22% after the struggling meme stock proposes a reverse stock split and APE share conversion

• AMC Entertainment plunged 22% on Thursday after the struggling meme stock announced a capital raise.
• The company is seeking more than $100 million in capital via the sale of its APE share class.
• AMC proposed a 1-for-10 reverse stock split and the conversion of all APE units into AMC common shares.

AMC Entertainment's common stock plunged on Thursday while its preferred equity units soared after the struggling movie theater chain announced a proposal to convert all of its APE units into AMC common stock.

The company said it was selling over 100 million APE units at $0.66 per share to raise $110 million in new capital and retire about $100 million in debt that matures in 2026. The move is expected to reduce AMC's annual interest expense by $10 million.

Additionally, the company proposed a 1-for-10 reverse stock split, which is typically viewed as a negative by investors. If the split passes, AMC's stock price would trade at about $41.

AMC's common shares sank 22%. Meanwhile, AMC's preferred equity units, often referred to by its ticker symbol APE, soared more than 90% on the hope that the preferred stock, which represents a 1:1 claim on the company's equity value, would be converted into common shares.

If the proposal receives shareholder approval, the prices of the two different AMC stocks should converge in price, representing significant upside for APE. There's a big gap based on current prices, with AMC's common stock trading just over $4, while the APE stock is trading just over $1.

Going long APE shares and short AMC common stock was a trading strategy utilized by famed short-seller Jim Chanos earlier this year.

AMC CEO Adam Aron said in a press release that converting APE shares into common stock will address that spread.

"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."

AMC has raised nearly $300 million through the sale of stock over the last three months, via an at-the-market equity offering.

AMC needs the cash because it hasn't seen a profitable quarter since June 2019, when measured by net income. The company lost $227 million in its last quarter.

That's because the box office hasn't been strong this year, with only a few blockbuster movies this year generating big ticket sales, like "Top Gun: Maverick." The company is hoping for a strong turnout for Disney's "Avatar: The Way of Water," which saw just over $130 million in ticket sales in its opening weekend.

The movie theater box office is expected to see a stronger showing in 2023 due to a slate of anticipated movie releases.

Since AMC issued its APE units in August, the share price is down 88%, even when considering Thursday's near doubling in the stock price.