APE shares, bankruptcy warnings crater 2 theater stocks

Theater stocks took a deep dive this week as the world's two largest movie houses made headlines for strategic announcements.

Regal Cinemas-parent Cineworld Group PLC is evaluating a "comprehensive deleveraging transaction" that could include a Chapter 11 bankruptcy filing, the company said in an Aug. 22 filing. That ominous announcement was the culmination of bankruptcy chatter that had found its way to the press and an Aug. 17 Cineworld press release acknowledging that it was in discussions with various stakeholders to maximize liquidity, potentially requiring a restructuring of its balance sheet.

Meanwhile, AMC Entertainment Holdings Inc. shook up its investor base in other ways, rolling out a new share class dubbed "AMC Preferred Equity." Distributed to its common stockholders as a dividend, those new preferred shares began trading under the ticker APE on Aug. 22.

Both announcements took a significant toll on the stocks of Cineworld and AMC, with Cineworld down 94% year-to-date as of market close Aug. 25. AMC, meanwhile, was down almost 65% over the same time period, though AMC's valuation was effectively split by the APE issuance. Cinemark Holdings Inc., the third largest cinema chain, also faired poorly in the latter weeks of August and was down almost 5% year-to-date.

Empty boxes

Part of the reason Cineworld's announcement impacted the exhibitor sector widely is that the company cited a decline in theatrical admissions as a reason for its strategic review. A sparse film release slate in the second half is likely to negatively impact Cineworld's liquidity, the company said, which could ultimately result in a corporate default.

That guidance came after AMC reported a second-quarter earnings beat Aug. 4 that seemed to suggest a theatrical recovery, pushing AMC's stock up almost 60% in the first two weeks of the month. When investor sentiment sharply reversed following Cineworld's guidance, AMC issued an Aug. 18 statement that attempted to reassure investors about its second-half outlook by noting AMC's much stronger liquidity position. AMC has $1 billion in liquidity, and the company said its APE issuance will strengthen its position over time.

Cineworld's troubles and guidance do not significantly change the investment thesis for AMC and Cinemark, Wedbush Securities analyst Alicia Reese said in an Aug. 23 note.

"AMC has plenty of cash to weather a two-month slump and is well-positioned for a strong [fourth quarter] and 2023," Reese said.

Out on a limb

The spread between Cineworld's debt and equity has widened steadily over the past five years, especially after the company's 2018 acquisition of Regal Cinemas.

AMC, meanwhile, was able to ride its unexpected "meme stock" status to refinance debt, issue stock and reengineer its balance sheet during the pandemic. The "meme stock" phenomenon involved swarms of retail investors piling into stocks of loved brands while defying traditional Wall Street financial considerations.

"Not every stock in the U.S. market can be a meme stock," Cineworld CEO Mooky Greidinger told The Wall Street Journal in late 2021.

Cineworld closed 2021 with total debt of $9.23 billion. While AMC had more debt, ending 2021 with $10.75 billion, the company's equity value benefited as its stock gained popularity.

Cineworld faced an additional challenge related to its ill-timed 2019 agreement to acquire Canada-based Cineplex Inc. Cineworld sought to cancel the transaction in 2020 as revenue flatlined during the pandemic, but Cineplex claimed Cineworld was in breach of contract. A Canadian court agreed, requiring Cineworld to pay Cineplex about $1 billion in damages. Cineworld's entire market value was roughly $700 million at the time.

While the court decision is under appeal, the prospect of paying significant damages could be a factor in Cineworld's need for restructuring, analysts said.

Planet of the APEs

AMC executives, meanwhile, leveraged the company's meme stock status to survive AMC's own near-bankruptcy experience.

AMC's nonprofessional and non-insider traders account for about 72% of its ownership, according to S&P Global Market Intelligence. AMC is actively courting its new investors with benefits including the new special equity dividend.

AMC's APE issuance "is a clever way for management to take advantage of the enthusiastic retail interest in the common equity over the past 18 months," wrote B. Riley Securities analyst Eric Wold in an Aug. 19 note. Wold maintained a "neutral" rating and an $11 price target on the company's stock.

AMC distributed an APE share to each common shareholder as a dividend, effectively initiating a two-for-one stock split. At APE trading levels in the fourth week of August, the company could issue less than 1 billion more shares and pay off its entire debt load, Reese at Wedbush said. The company is authorized to issue up to an additional 4.5 billion more APE shares.

Still, Reese noted some risks for AMC investors in the near term and dropped the stock's price target to $2 per share from $4. The company's effective stock split should imply a corresponding revaluing of the shares, and investors face another potential dilutive event if AMC issues more APE shares, the analyst said. Reese remained on AMC's operational performance, however.

"We expect AMC to wait for APE shares to stabilize with AMC [shares], then issue a portion of its authorized APE shares for cash to pay down the majority of its outstanding debt," Reese said. "Debt repayment ... would make AMC a more attractive long-term investment."