Shares of AMC Entertainment Holdings Inc (NYSE:AMC) closed -40% lower on Monday after the British rival Cineworld warned it is considering bankruptcy, pushing investors away from the movie theater and entertainment stocks. The downward trend continued on Tuesday, as AMC closed under $10.
Cineworld Considers Chapter 11
The sharp decline in AMC shares came after Regal cinemas owner Cineworld warned of potential bankruptcy risks as the London-based entertainment company struggles to grapple with a $5 billion debt.
Shares initially plunged last week when the WSJ reported that Cineworld is close to bankruptcy. The company confirmed yesterday that it is considering triggering Chapter 11 of the United States Bankruptcy Code, which is typically seen as a "reorganization" bankruptcy.
Cineworld's bankruptcy concerns come as the British cinema chain operator struggles to reduce its $5 billion debt pile. On a more positive note, the company said it plans to remain open for business yesterday and promised this would not make a notable impact on jobs. Cineworld currently has over 28,000 employees worldwide.
The movie-theater company was one of the hardest-hit during the devastating COVID-19 pandemic, which forced numerous theatres to shut down operations or impose significant social distancing measures.
The bankruptcy warnings come as the cinema chain is exploring different ways to restructure its struggling business. A potential Chapter 11 bankruptcy filing would allow Cineworld to continue operating while negotiating with its creditors.
The company did not specify whether it may also file for bankruptcy in the home market and how exactly that would affect its 4,600 U.K.-based employees. It also remains unknown how the move would affect moviegoers who are paying for the Cineworld or Picturehouse membership.
The company said in the statement:
"Cineworld would expect to maintain its operations in the ordinary course until and following any filing and ultimately to continue its business over the long term with no significant impact upon its employees."
Cineworld also raised concerns about an insufficient number of major film releases to attract large audiences. Prior to the pandemic, global box office takings reached a record $42.5 billion, boosted by big hits such as Avengers: Endgame and Frozen 2.
Impact on AMC?
While the coronavirus pandemic battered most cinema chain operators, AMC secured $1.8 billion last year thanks to the meme-stock craze in which retail investors propelled the stock prices of several companies.
AMC's long-term debt stood at over $5 billion at the end of the second quarter, rising to more than $10 billion when lease obligations and other long-term liabilities are included.
The movie theater chain also reaffirmed a relatively weak film slate in Q3 2022 last week. The U.S. box office is still significantly below its pre-pandemic numbers even though several big blockbusters hit cinemas this year, such as "Top Gun: Maverick", one of the highest-grossing films of all time with $1.8 billion at the global box office.
This year, only Jurassic World Dominion and Minions: The Rise of Gru have seen strong box office performance, in addition to the new Top Gun. Compared to 2019, box office takings this year remain down 32%.
Furthermore, the unprecedented rise of streaming services like Netflix (NASDAQ:NFLX), Disney+, and HBO Max during the pandemic also weighed on cinema chains. But even Netflix has had a challenging 2022 year, with the streaming giant reporting a sharp drop in subscriber numbers as red-hot inflation levels force consumers to cut their spending.
AMC CEO Adam Aron remained optimistic in the face of Cineworld's warnings, saying the company remains confident about its future and about the movies scheduled for release in Q4 and 2023.
For B.Riley analyst Erik Wood, the impact of Cineworld's troubles on AMC is likely to be "limited." Wood told investors in a note:
"[AMC is] well positioned to push through that weak slate, and we do not see any reason for investors to be incrementally concerned."
AMC shares are up more than 150% since late 2019, fueled mainly by the retail trading frenzy that helped several embattled companies, like GameStop (NYSE: NYSE:GME) and AMC Entertainment, to see their valuations increase significantly.
Shares of Bed Bath & Beyond Inc (NASDAQ:BBBY), another Reddit form favorite, also cratered. The merchandise retailer, also one of the meme-stock favorites last year, saw its shares drop over 40% last week after activist investor Ryan Cohen said he sold his entire stake in the company.
APEs Make Much Anticipated Debut
The huge drop in AMC stock comes on the same day the U.S. cinema chain's preferred stock, called AMC Entertainment Holdings Pref Units (NYSE:APE), debuted on the New York Stock Exchange (NYSE) at an opening price of $6.95 per share before closing at $6.00.
AMC said its preferred shares, intended as dividends, will carry the same voting rights as the common AMC stock and could be used to secure future funds. Trading of both preferred and common shares was stopped several times on Monday due to the increased market volatility.
Green Hill Capital chairman Thomas Hayes noted:
"The issue is that the APE security (dividend) is a dilutive security that should be viewed like a two for one split."
The cinema chain is "pretending to give existing shareholders something of value, but in reality, they are just paving the road for future dilution."
For Wood, the APEs are "a clever way for management to take advantage of the enthusiastic retail interest in the common equity over the past 18 months."
However, Jay Ritter, professor of finance at the University of Florida, expects APEs to decline "by about 50%" just like it usually happens "with a two-for-one stock split."
Summary
AMC shares opened the new week in a highly negative fashion amid investors' concerns about the spillover effect that could take place as British rival Cineworld considers bankruptcy. Still, both AMC's management and analysts are confident the company has enough of a strong balance sheet to withstand these challenges. The purchasing of AMC stock remains a popular move among the retail crowd, especially among the trading circles of various subreddits.
On the other hand, the company's preferred stock made its debut on the NYSE yesterday, with analysts divided on the benefits for shareholders and investors.