Uncovering the Arbitrage Benefits of AMC’s APE Meme-Stock Offer

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As the situation surrounding AMC Entertainment intensifies, a lucrative trading opportunity is becoming more evident. In the last Monday, settlement terms were reached between the company and certain plaintiffs for the issue of more stock which could potentially give rise to a capital raise. The gist of the settlement, in simple terms, is that all common stockholders will be issued a dividend of one additional common share for every 7.5 shares they hold.

AMC (ticker: AMC) stock closed at $5.08 on Monday, while APE (AMC Preferred Equity) was up 18.6% at $1.76 on Tuesday morning, which translates to a gain of $2.65 (or 150%), should they eventually be converted into common stock. A successful conversion would be music to the ears of APE holders.

It should be noted, however, that even if the settlement clears the way for conversion to take place, certain steps still need to be followed, including a shareholder lawsuit withdrawal, reverse stock split and APE conversion into common stock. Brian Wold from B. Riley Securities pointed out that there could still be a level of discount until everything is completed. He currently has a Hold rating on AMC stock with a target price of $4.50.

The recent developments create an intriguing outcome for investors, as AMC is hoping to reduce the company’s $5.2 billion debt; a debt to earnings before interest, taxes, depreciation and amortization ratio that currently stands at nine times, whereas S&P 500 companies have a ratio that is less than two times.

The goal is to raise equity capital, which could result in some level of dilution of common stockholders, however AMC’s enterprise value is currently estimated to be at $9 billion. Reducing debt would result in saving on cash payments of interest. With the right moves, AMC could become an attractive investment opportunity.

AMC Entertainment (AMC) is the world’s largest theatrical exhibition company, with more than 1,000 theaters and 11,000 screens located in 15 countries. It’s majority-owned by Chinese conglomerate Wanda Group, and is based in Leawood, Kansas. The company has been in business for over 100 years and is known for such brands as AMC Theatres, IMAX and ETX.

Brian Wold is a research analyst at B. Riley Securities. He covers publicly-viable company’s including AMC, Cineworld and Cinemark, offering reports and recommendations on them. Wold came to B. Riley team in 2014, bringing with him an extensive financial background and skill set. He has experience working in both the buy-side and sell-side, while his current primary focus focuses on the theatrical exhibition space.