AMC shareholders are making a huge mistake, Loop Capital says

Published Fri, Jul 9 202112:02 PM EDT

AMC Entertainment said this week that it would not seek to issue more stock after input from its shareholders, many of whom are Reddit-focused retail traders. Loop Capital Markets believes these investors are making a massive blunder. "[W]e think it is a huge mistake for the shareholders to not allow the company to issue more stock at what we perceive to be highly inflated prices," Loop Capital's Alan Gould said in a note released Friday. AMC shares have skyrocketed more than 2,000% this year amid speculative trading as the company garnered enthusiasm from retail investors, similar to moves seen in GameStop and Bed Bath & Beyond this year. The movie theater chain took advantage of the meme stock frenzy to raise new capital, including two recent share sales in June. The company raised $230.5 million through a stock sale to Mudrick Capital Management and another $587.4 million in an additional stock offering. "We highly doubt that AMC would have avoided bankruptcy if it had not become a meme stock and if management had not taken advantage of the share price to issue additional equity," Gould said. AMC CEO Adam Aron in June urged shareholders to support a plan to issue 25 million additional shares. But on Tuesday, the company said it would not move forward with a vote on the stock sale plan due to input from shareholders. "It's no secret I think shareholders should authorize 25 million more AMC shares. But what YOU think is important to us. Many yes, many no. AMC does not want to proceed with such a split," Aron said on Twitter. "And no more such requests in 2021." Gould believes AMC could have used the extra money from issuing additional equity to acquire other theaters or pay down its debt. "Now, in our view, AMC has little hope of gaining significant market share and will have to pay cash for acquisitions, debt retirement and executive compensation," Gould said. Shareholders typically are not in favor of additional stock offerings because more shares can dilute the value of their current holdings. But as AMC shares remain highly inflated, Loop Capital said investors should not be concerned about the company issuing more stock. "[W]hy are investors worried about the potential dilution of issuing equity at the current stock price, currently trading at about 40x our 2023 estimated [earnings before interest, taxes, depreciation, and amortization]," Gould asked. Loop Capital r