Well, it hasn’t even been 2 weeks since my last post on movie theater chain AMC Entertainment (AMC), but wow have things shifted. The massive trading interest in heavily-shorted GameStop (GME) from the Reddit/wallstreetbets contingent has made every heavily shorted stock a target for massive day-trading and speculation on the long side to try and squeeze the shorts.
Given the poor fundamental outlook and balance sheet at AMC, highlighted in my prior post, it should not be surprising that the company was heavily shorted. Like GameStop, AMC faces a tough competitive environment, though the latter has far less debt (GameStop’s balance sheet means they are not faced with bankruptcy risk in 2021, in my view, but if they don’t execute well in their operations, that could change in a few years’ time).
So, what happens when the Reddit crowd gets ahold of AMC stock? Well, from January 20th when I wrote my post, the stock surged from $3 to a high north of $20 last Wednesday. Not only did the little guys and gals make money on their trades during that time, but some of the big guys/gals they hate also made out well.
Silver Lake Partners, a large, well known private equity firm held $600 million of AMC convertible debt due in 2024, which was in a dicey spot with the convert price well into the double digits. Well, they acted fast last week, converting the debt into 44 million shares of equity as the stock surged into the high teens, and selling every single share the same day the stock peaked. That’s right, they go from being one of the largest AMC worrying creditors to being completely out at nice profit in a matter of days. Note to Redditers: that’s how you ring the register!
The fact that Silver Lake saw a chance to exit and didn’t hesitate only confirms my negative view of AMC’s financial condition and business outlook. In fact, although I rarely short stocks in my personal account, I initiated a very small short position in AMC stock this morning above $17 per share. It won’t be a life changing profit even if the stock eventually winds up being a zero (I don’t make large, risky bets like the Robinhooders), but why not be opportunistic like Silver Lake?
The borrow fee on AMC was small, as the company has been issuing shares like crazy in recent weeks to try and raise more capital to stave off bankruptcy. It’s hard to pinpoint the exact figure, given all of the financial engineering going on with them right now, but as of 10/30/2020 there were about 137 million common shares outstanding (compared with about 45 million shorted last month). Add in 44 million from Silver Lake’s convert, 22 million issued to convert $100 million of debt owned by Mudrick Capital, and 228 million new shares sold into the market as prices rose, and the new share count is probably north of 400 million.
At my short price, the equity value is nearly $7 billion. Now, the debt balance has gone down some with Silver Lake converting their $600 million convertible, but that is offset by a $400 million credit facility expansion recently announced. So the debt balance is probably still around $5.5 billion. A $12.5 billion enterprise value for a company that earned EBITDA of $670 million in 2019 and has been burning cash during the pandemic due to theater closures? That’s bonkers.
All in all, while this flurry of activity and share sales may give AMC enough cash to make it to 2022, the future remains bleak and the balance sheet is still a mess. The only way out longer term appears to be a material increase in sales and profits at their theaters post-pandemic (versus pre-pandemic levels, not 2020), and that is not a bet I would be willing to make.