This post is part of a three part series detailing how Wall Street exploits and social media activism helped AMC, the world’s largest cinema chain, survive the economic upheaval caused by the COVID pandemic. Part 1 of the series can be found here and Part 3 can be found here.
AMC spent most of 2020 putting out the financial fires ignited by having to close their theatres to comply with COVID health restrictions. As we entered 2021, with a contrarian hedge fund like Mudrick Capital Management actively working to take over AMC by forcing it into bankruptcy, the world’s largest exhibitor was quickly running out of options and time, not to mention cash. Wall Street, the media and industry pundits monitored each of AMC’s SEC filings waiting for what they felt was the inevitable announcement that the company had finally run out of all three. It would take a miraculous series of fortunate events for any other outcome. Nobody could have predicted the backstabbing and unlikely saviors that allow AMC to still be in business at the end of August, sitting on nearly USD $2 billion in cash.
Rise of the Day Trader Apes
In January 2021 the only move AMC’s CEO, Adam Aron, could make to stave off bankruptcy was to sell more shares of their stock which was hovering just above USD $2.00 at the time. The company made plans to raise USD $125 million through selling 50 million shares. However, before the stock offering was complete AMC share prices began rising thanks to so-called retail investors, or those not tied to investment banks or institutional funds. Day traders had begun noticing AMC’s stock being shorted by investors, specifically hedge funds. Using forums on Reddit, a popular social news and discussion website, day traders began to synchronize their purchases of stock in heavily shorted companies such as AMC and GameStop. Their goal was to initiate a short squeeze, a rare occurrence when the price of a heavily shorted stock quickly rises causing short sellers to exit their positions by forcing them to buy the stock to cover their investment. As the volume of purchases in the stock increases, so too does its share price.
It is somewhat ironic these retail traders refer to themselves as “apes” after a meme based on dialogue from the 2011 film “Rise of the Planet of the Apes,” “Apes together strong.”
On 25 January day trader activity skyrocketed allowing AMC to sell 164.7 million shares in an at-the-market offering that raised USD $506 million. Announcing the equity financing, AMC confirmed it had raised an additional USD $411 million in debt financing. Traditionally the equity dilution combined with an increased debt burden would have lowered the stock price, but as day traders bought up the new shares, its price rose, closing the day at USD $4.42, up 25.9%. At the time Aron proclaimed, “…over the past six weeks AMC has raised an additional $917 million capital infusion to bolster and solidify our liquidity and financial position. This means that any talk of an imminent bankruptcy for AMC is completely off the table.”
As the price went higher on 26 January more day traders dove into AMC’s stock, reveling in watching the short sellers squirm. Then, on 27 January AMC’s stock was driven up by 301% to USD $19.90, on volume of over 1.2 billion shares. Trading of AMC’s stock was halted numerous times throughout the day to manage volatility. Somehow that didn’t stop Silver Lake Management from converting the USD $600 million in AMC convertible bonds (debt) that it had purchased from the company’s Chinese-based owner, Wanda Group, back in 2018 into 44 million shares of stock which they promptly sold for USD $713 million or USD $13.51 per share. While this flooded the market with new AMC shares, it also wiped $600 million of debt off the company’s books.
Shares in AMC quickly settled down to between USD $5 and $10, where they stayed through the middle of May, rising into the teens for only a brief period in March, when the exhibitor announced that it would start reopening its theatres in New York and California. During this time period the company sought authorization to issue 500 million new shares of AMC stock, close to doubling the number of shares and essentially diluting current investors by half. That plan was unpopular with investors of all stripes so instead on 27 April AMC issued 43 million shares at another at-the-market offering. Within six trading days the company had sold 17.5 million shares at an average price of USD $9.77 and raised an additional USD $172 million.
Mudrick’s original bet that it could drive AMC into bankruptcy through death spiral financing was, as Aron suggested back in January, proving to be impossible. The theatre chain was able to turn back to the market twice thus far to offer more shares at a price far greater than should have been expected given its recent dilution. However, the hedge fund was still in the clear on its naked call offering, since AMC’s share price had yet to come anywhere near USD $40. Remember, Mudrick sold those call options in AMC without actually owning any of the stock.
What in the Wanda?!
There was a reason why AMC’s stock was struggling to close higher than USD $15, despite all of the day trader activity; the Wanda Group, which originally purchased the company in 2012 for USD $2.6 billion. Thanks to a dual share structure, Wanda controlled 64.5% of shareholder voting power last October while holding only 37.7% of its stock through its ownership of 51.8 million shares of Class B common stock. Each Class B share was given three votes on anything put to a shareholder vote, whereas Class A shares of AMC are only given one vote.
Starting in December of 2020 Wanda began to divest itself of AMC, reducing its stake to 23.08% of the company’s stock and 47.7% of the voting rights before the end of the year. Realizing that its equity would be diluted further in the coming months, combined with AMC’s unrealistically high stock price, Wanda converted all of its Class B shares into Class A shares. This was a sign that the Chinese company would, once and for all, soon be out of the AMC business.
In fact, on 3 March Wanda sold 15.6 million AMC shares for USD $220 million, reducing both its voting and economic stake in the company to 9.8%, officially giving up control. It jettisoned another 30.4 million shares for $426.9 million on 21 May, retaining only 10,000 shares of the company, a 0.002% stake. This move set off a chain of rapid-fire financial events over the next month that caused AMC’s stock price to balloon 374.5% from its closing price of USD $12.02 the day Wanda exited.
Since the end of January Reddit day traders had fruitlessly been trying to cause the share price of AMC to hit at least USD $20. From there, an en-masse purchase of the stock would cause it to rise even more, inching it closer to a short squeeze which might, in theory, catapult it into the USD $100 range. However every time the stock price hit USD $15 it would tumble to below USD $14. This was because Wanda was selling portions of its 51 million shares whenever the stock price was roughly USD $14.50, flooding the market with AMC stock and lowering the price. In effect, Wanda was causing the market to behave as it should; when supply of a security surpasses demand its price declines or stays the same. It also managed to keep Mudrick’s naked call gamble safe.
With Wanda out of shares to sell however, there was nothing to stop day traders from plotting on Reddit’s WallStreetBets forum and going long on AMC’s stock. Over the next week these retail traders went to work and pushed the exhibitor’s share price to USD $26.12 on the Friday before Memorial Day. This was a far cry from the USD $2.04 that AMC was trading at on 4 January of this year; a more than 1,206% increase. A short squeeze on short sellers was within reach. If that happened, the stock price could shoot past USD $40 triggering holders of Mudrick’s USD $50 million worth of naked calls to exercise their options. In turn, Mudrick would have to buy AMC shares on the open market at retail prices, which would then cause the price to go even higher, causing the firm to lose even more money on the investment.
Mudrick’s Memorial Day Mayhem
Mudrick had a plan, however, and over Memorial Day weekend negotiated a deal with Aron and AMC to purchase 8.5 million new shares in the company for USD $230.5 million, paying a premium of USD $27.12 each. The hedge fund also learned that the theatre chain was planning to float 11.5 million new shares the following week to raise more cash. Then, on Tuesday 1 June when the market opened after the holiday weekend, Mudrick earned a few million dollars profit by immediately selling all 8.5 million shares, publicly stating that they were overvalued. As Bloomberg pointed out at the time, this was a very unusual move:
“Raising cash through an equity sale to a single holder is relatively rare in U.S. markets. Having the holder flip the stock right after buying it is almost unheard of – usually the buyer is an existing stakeholder trying to send a message of stability to the market.”
Mudrick’s goal was to send the exact opposite message; that the current share price of AMC was unsustainable given the company’s poor financial health which would likely call for further equity dilution. That would mean the share price would, theoretically, have to decline; those that own the company’s stock should sell before it falls and those thinking of investing in the theatre chain should wait. It was a message and move intended to suppress AMC’s stock price.
At this point Mudrick wasn’t trying to send AMC into a death spiral but rather prevent their naked calls from being exercised. This was a clear cut case of market manipulation and, for a few hours, it worked. That afternoon, the apes helped AMC’s share price recover and it closed the day up 23% at USD $32.04.
Mudrick should have covered its calls the same day. They still would have taken a substantial loss on their investment, but the damage would have been contained. Instead, they held their position overnight hoping that when news of AMC’s 11.5 million share offering broke it would throw cold water on the stock price, something that its own 8.5 million share sell-off failed to do.
However, the apes were well aware of Mudrick’s overextended position, as evidenced by all the chatter on Reddit, and on 2 June sent the stock soaring past USD $40. This not only forced Mudrick into the market to buy shares of AMC to cover its call options, but also triggered margin calls on short sellers. At one point AMC’s stock reached USD $72.62 before closing the day at USD $62.55, a 95% increase. Mudrick lost USD $380 million, a full 10% of its total fund.
As one ape posted on Reddit, “Mudrick didn’t stab AMC in the back… They shot themselves in the foot.”
What the day traders failed to mention, or perhaps didn’t realize, is the combination of Mudrick’s investment shenanigans and their own trading activity would, within 48 hours, help stabilize AMC’s finances and secure its future.
Tomorrow: AMC goes on the offensive; rewarding its unlikely rescuers while also improving its financial health and making plans to take over new theatres.
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