AMC reverse stock split, APE conversion remove 'overhang,' analyst says in upgrade

By James Rogers

'We think AMC is well-positioned against an improving industry backdrop,' says Wedbush analyst Alicia Reese

After months of legal battles AMC Entertainment Holdings Inc. is set to finally implement its reverse 1-for-10 split of its common stock and AMC Preferred Equity unit stock conversion, in a move that the company says will help it raise additional equity capital.

Set against this backdrop, Wedbush raised its AMC (AMC) price target to $19 from $2 Thursday. "AMC's court case resolution removes a significant overhang, and we expect AMC shares to settle around our new $19 price target post-conversion and post-reverse-stock-split," said Wedbush analyst Alicia Reese, in a note.

Wedbush also upgraded AMC to neutral from underperform. "We think AMC is well-positioned against an improving industry backdrop," said Reese, in the note, adding that Wedbush expects North American box office to end up 20% higher than 2022.

Related:What's next for AMC after court approval of revised stock-conversion plan?

Of eight analysts surveyed by FactSet, four have a buy rating and four have a sell rating for AMC.

Earlier this month AMC's revised stock-conversion plan was approved by the Delaware Chancery Court. AMC's plan to convert its APEs to common stock was blocked last month when Delaware Chancery Court Judge Morgan Zurn rejected a settlement that would have allowed the deal to proceed. The stock-conversion plan is part of the movie-theater chain and meme-stock darling's ongoing battle to eliminate debt.

AMC CEO Adam Aron described the court's approval as a "significant milestone" in a letter to investors earlier this month. "Knowing that we can do our best for AMC to smartly raise capital is a terrific relief," Aron said. The CEO has repeatedly warned that AMC faces liquidity challenges.

Related: Famed short seller Marc Cohodes rails against 'sociopath' critics and says he lost 'a million dollars' on AMC bet in wild interview

Wedbush's Reese notes that AMC's reverse stock split takes place Thursday, reducing its common share count to 52 million. "Then on Friday, AMC's 995 million APE shares will convert to roughly 100 million AMC shares," she said, adding that APE shares will no longer trade as of Friday. "On August 28, AMC will pay out one additional share per every 7.5 owned as of closing on August 24, resulting in 59 million pre-conversion AMC shares -- a 13% increase in the pre-conversion AMC share count."

This will ultimately result in 158 million AMC shares outstanding. "Once AMC completes these actions, it will have the authorization to issue up to 550 million additional shares without further shareholder approval," said Reese. "AMC may use the opportunity to repay some or all of its debt balance while AMC shares are still trading at a premium."

AMC shares were down more than 20% Wednesday, before ending the session down 1.5%. Heavy retail trading took place in AMC Wednesday, where buy outnumbered sell orders 2.5:1, said J.P. Morgan, in a note.

Related:AMC data indicates 'panic' ahead of APE stock conversion, says Stocktwits

Shares of AMC are down 11.5% in premarket trades Thursday. The APEs are down 5.8%.

The movie-theater chain has been on a roller-coaster ride over the past few years that took it from beleaguered pandemic victim to meme-stock phenomenon. AMC used the steep rise in its share price to tap into equity and debt markets, raising $917 million in January 2021.

-James Rogers

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08-24-23 0830ET

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