Just a few days back, AMC shares fell below the $8 share price handle, essentially giving away the entirety of the gains generated during the meme stock frenzy of 2021. However, even as the stock plummeted toward this somber nadir, hopes of a more sustainable recovery began taking root. These pubescent bullish aspirations though have now been overshadowed by the potentially problematic conduct of the theater chain's CEO, Adam Aron.
Sexually Explicit Pictures, Extortion, and "Personal Matter" Assertions
Semafor has now published a salacious account of AMC's Adam Aron, detailing an extortion attempt against him that landed its perpetrator in jail.
Back in March 2022, Blackwood began chatting with Aron by sending him pictures of a Russian model. Aron mistook the model for a former acquaintance who, as per his texts, had performed "unmentionable things." In the ensuing correspondence, Aron sent Blackwood sexually explicit pictures, thereby precipitating an elaborate extortion scheme for hundreds of thousands of dollars via fake online identities.
Throughout my long career, I have successfully led many prominent companies and am proud of my impeccable reputation. In recent years, AMC's millions of retail shareholders have played a central role in my life. Your passion for our company is one of my key motivators in doing…
— Adam Aron (@CEOAdam) October 12, 2023
Of course, Miss Blackwood was eventually arrested and sent on a 1-year stint in jail. For his part, Adam Aron continues to assert his "impeccable reputation" as well as his right to privacy. While Aron did not share AMC's corporate secrets with the blackmailer, as per the prosecutors, his questionable judgment and a hefty dearth of prudence in this saga will likely increase the pressure on AMC's board to find a suitable replacement.
AMC's Dilution on Steroids
As stated earlier, AMC's shares recently gave up all of their humungous 2021 gains. The culprit: a protracted court battle that then paved the way for unbridled dilution.
In March 2023, AMC sought authorization from its shareholders to increase its common stock count by around 10x, concurrent with a 10-to-1 reverse stock split. Interestingly, the company glued this authorization with another proposal to convert its APE units into common equity. After accounting for APE convertibility, the increase in AMC's share authorization would allow the company to raise additional capital.
Some AMC investors, however, sued the company for being short-changed in the ensuing voting process via the weaponization of AMC Preferred Equity (APE) shares and were able to win a status quo order from the court.
AMC hastily negotiated a settlement with its litigant shareholders. Under the terms of the agreement, immediately after the conversion of APE units into common equity, AMC would issue one additional share for every 7.5 common shares held (or 6.9 million common shares in total). This payment, which could be worth over $100 million, was meant to compensate investors.
AMC then filed this settlement in the Delaware Court of Chancery to vacate the status quo order. During the hearings, the court received almost 4,000 letters from around 3,000 investors, who cited fears of unbridled dilution of their investment. This settlement, however, was rejected by the court. AMC then filed a revised settlement that converted its APE units into common shares and also involved a reverse share split.
In the aftermath of this settlement, AMC filed to sell up to 40 million additional shares, prompting a brutal plunge in the stock in early September. The company maintained that it needed this fresh infusion of liquidity to stave off bankruptcy.
AMC's Improving Fundamentals
Despite AMC's multi-faceted woes, exacerbated by the personal conduct of its CEO, the company remains perched on the recovery course. In Q2 2023, AMC's sales increased by 16 percent to $1.35 billion, and adjusted EBITDA grew 71 percent on an annual basis. The theater chain has dramatically managed to increase its revenue per patron by focusing on the food and beverage segment. In fact, AMC is mulling the launch of a branded beer named "Great Ape Ale."
In Q3, AMC is expected to have benefited from hits such as Barbie and Oppenheimer. As per the tabulation by B. Riley analysts, AMC's box office revenue per screen recovered to 93 percent of the Q2 2019 levels in the pertinent quarter vs. just 82 percent for the wider industry. Moreover, the upcoming screening of 'Taylor Swift: Eras Tour' is expected to boost Q4 numbers significantly.
All of these factors bode well for the stock's appreciation prospects, moderated by the headwinds that are sure to materialize if Adam Aron does end up on the chopping block. Bear in mind that Aron, in many ways, has been the face of the meme stock mania and has played an important role in driving brand loyalty among AMC customers. It remains to be seen if his potential replacement can bring equal charisma to the stage.
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