AMC Entertainment (NYSE:AMC) stock is down by more than 20% today after the theater chain announced that it would offer and sell up to 40 million shares of common stock through a prospectus supplement. The sale is pursuant to a Form S-3 shelf registration statement filed on Aug. 4.
In the prospectus supplement, AMC warns that its stock is extremely volatile, stating in bold that “Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”
The sales agents of the equity distribution agreement, such as Goldman Sachs (NYSE:GS) and Barclays Capital, will collect a 2.5% commission on the gross sales price of the shares. AMC added that proceeds from the sale will be used to “bolster […] liquidity, to repay, refinance, redeem or repurchase [its] existing indebtedness (including expenses, accrued interest and premium, if any) and for general corporate purposes.”
AMC Files to Sell Up to 40 Million Shares of AMC Stock
Following AMC’s 1-for-10 reverse split, the APE into AMC stock conversion and AMC’s litigation payment, there were 158.37 million shares outstanding as of Aug. 24. If AMC chooses to offer and sell all 40 million shares, which seems likely, that would mean that shares outstanding would increase by a significant 25.25% to 198.37 million. The company also has the power to offer more shares in the future, as it is authorized to issue up to 55o million shares.
The offering shouldn’t be surprising news for shareholders, as CEO Adam Aron had previously penned a letter highlighting the importance of equity capital. Aron warned that AMC could run out of cash by 2024 or 2025 if it was unable to raise equity capital.
“AMC Entertainment must put ourselves in a position to be able to raise equity capital,” said Aron. “That is what will make it more likely that first we survive and then that we thrive.” Aron also explained that there are many AMC short sellers and one of the ways to “defeat that short thesis” is to remove bankruptcy risk by raising equity. At the same time, raising equity has the effect of diluting shareholders.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
