Investing

Before the Bell: AMC Converts APE Shares; Strong Jobs Report Cools Market

Paul Ausick

Published: February 6, 2023 7:27 am

Premarket action on Monday had the three major U.S. indexes trading lower. The Dow Jones industrials were down 0.67%, the S&P 500 down 0.90% and the Nasdaq 1.21% lower.

All 11 market sectors closed lower Friday, with consumer cyclicals (−3.11%) and communication services (−2.22%) posting the day’s biggest losses. Financials (−0.10%) and energy (−0.23%) closed with the day’s smallest declines. The Dow ended down 0.38%, the S&P 500 down 1.04% and the Nasdaq down 1.59%. Traders’ reaction to the strong payroll report led to worries that the Federal Reserve would continue with rate hikes, possibly through the end of the year.

Friday’s trading volume was in line with the five-day average. New York Stock Exchange losers led winners by 2,248 to 837, while Nasdaq decliners led advancers by about 4 to 3.

The January report on nonfarm payrolls came in stronger than expected, with 517,000 new jobs, versus a consensus estimate of 190,000, and an upwardly revised December total of 260,00. Headline unemployment fell from 3.5% to 3.4%, where economists were looking for an increase to 3.6%.

Later this week, the weekly report on claims for unemployment benefits and the preliminary reading on the University of Michigan consumer sentiment index are due.

Among S&P 500 stocks, Clorox Co. (NYSE: CLX) added 9.77%, after beating expected quarterly earnings per share (EPS) and revenue, as well as raising fiscal 2023 revenue guidance. Cybersecurity specialist Gen Digital Inc. (NASDAQ: GEN) dropped 9.63%, after guiding current quarter revenue below the consensus estimate. Amazon.com Inc. (NASDAQ: AMZN) dropped nearly 8.5% after announcing that the company would suspend its rollout of new Fresh stores. In the United Kingdom, the company also is reported to be subletting warehouses it leased during the pandemic but never used.

Theater operator and meme stock favorite AMC Entertainment Holdings Inc. (NYSE: AMC) is about to have its way with reluctant holders in its common stock. Way back in March of 2021, the company tried to get shareholders to approve a near-doubling of common stock. It did not happen.

Last August, however, AMC issued preferred shares (NYSE: APE) that do not require shareholder approval, nor are they subject to the company’s chartered cap of around 524 million shares. AMC can issue 50 million APE shares, according to the company’s charter, at any time, in pretty much any manner. APE shares have all the voting and economic rights of its common shares.

The catch is that 50 million preferred shares will not be enough for the company to guarantee an increase in the company’s common stock. Here’s where AMC got clever, according to Bloomberg’s Matt Levine:

AMC made each preferred share equivalent (in voting and economic rights) to 100 common shares, and then it made each APE — technically not a share at all, but an AMC Preferred Equity unit — equal to 1/100th of a preferred share. If you buy an APE unit, what you are getting is 1/100th of an AMC preferred share, which is equivalent to 100 common shares, so you are getting the equivalent of one common share. It all works out. And AMC’s board authorized one billion APEs, which would take only 10 million of the 50 million preferred shares it is allowed to issue.

AMC did not issue preferred stock to individual retail investors, it issued American depositary receipts (ADRs) through Computershare Trust, the depositary institution that holds the actual shares for shareholders. Computershare is the real owner of the APE shares.

At a special shareholder meeting on March 14, AMC will vote to authorize converting APE shares to common stock and to effect a 10-for-1 reverse stock split. Here’s what Levine noticed in AMC’s filing:

In the absence of specific instructions from Holders of Receipts, the Depositary will vote the Preferred Stock represented by the AMC Preferred Equity Units evidenced by the Receipts of such Holders proportionately with votes cast pursuant to instructions received from the other Holders.

Remember, holders of APE ADRs do not own the shares, but Computershare does. And, Levine writes, “Computershare agreed that it would vote all of its preferred shares [in favor of the conversion], even if some APE holders didn’t vote.” APE ADR holders have no reason to vote against the proposal and lots of reasons to vote for it.

At Friday’s closing price of $2.83, APE shares cost $3.25 less than AMC common shares that ended the day at $6.08. Julian Klymochko, CEO of Accelerate Financial Technologies, told Bloomberg: “This is by far the most-attractive arbitrage situation out there. You don’t see a hundred percentage plus gross return in six weeks very often on a high probability deal.”

Both APE ADRs and AMC common shares were trading up 5% in Monday’s premarket.