What Happened with AMC and APE?

In the Fall ’22 I assigned this problem for my Economics of Financial Markets and Institutions class.

AMC Entertainment’s common stock is currently trading at $7.11 per share. The company’s preferred stock, ticker symbol APE, is trading at $2.49 per share. The preferred shares purportedly offer the same rights as the common shares. To the extent that the rights and entitlements afforded the owners of AMC and APE shares are the same, the prices of those shares should be equal. Is there an explanation for this difference or is this a market anomaly?

I don’t know the answer to this question. I would consider the possibility that the shares do not provide the equivalent rights. I would consider whether the transaction costs associated with short-selling AMC shares prevents the market prices of AMC and APE from converging. I have also read something about the possibility that APE shareholders could be diluted by subsequent offerings. There may be some other reason.

The SEC registration for the preferred stock can be found here: https://www.sec.gov/Archives/edgar/data/1411579/000110465922086192/tm2222422d4_8a12b.htm .

Here’s an article that may be a useful starting point: https://seekingalpha.com/article/4543397-apes-almost-completely-pointless .

For your answer: explain the rights afforded the APE shareholders (are they the same as AMC shareholders?), then search for a reason why the APE shares should be worth less and explain that reason to the best of your ability. I don’t think this will be easy. I recommend spending no more than three hours on this.

Since the Fall ’22 semester, much has transpired. In February 2023, a Pennsylvania pension fund filed a class action lawsuit against AMC, claiming that the AMC’s directors had breached their fiduciary duty to shareholders and that the APE shares were invalid. That lawsuit was settled on August 11, 2023, when AMC agreed to issue of additional shares of common stock to current common stockholders to offset the dilutive effects of the conduct underlying the plaintiffs’ claims. The parties had reached an earlier agreement, but that settlement was rejected by the court on Friday, July 21st. Interestingly, the rejection of the settlement caused AMC’s share price to surge the following Monday, July 24th.

The new settlement, approved by the court on Friday August 11th had the opposite effect as it became apparent that AMC would be allowed to convert the APE shares into common stock, causing dilution of the existing AMC shareholders. The price of AMC declined sharply while the APE shares gained. But, as of August 18, 2023, the price for AMC was $4.09 per share, compared to $2.27 for APE.

Part of the explanation for the persistent differential is that there remains the possibility that the conversion may be blocked, as the shareholder litigation may not have fully run its course. In fact, on August 15th a lawsuit was commenced by APE shareholders to block the implementation of the August 11th settlement. The APE shareholders allege that the distribution of additional shares made to AMC shareholders pursuant to the settlement must also be made to APE shareholders as well.

The more compelling explanation has to do with transaction costs. Introductory finance classes, such as mine, usually discuss transaction costs such as commissions (although those have mostly disappeared) and bid-ask spreads. The AMC/APE situation highlights another type of transaction cost that can prevent the prices of otherwise identical assets to converge – the Cost to Borrow (“CTB”). The CTB is the price that investors pay to short sell a stock. A stock’s CTB is expressed as an annual percentage of its share price. Various sources have quoted the CTB for AMC at over 800%, making it one of the most expensive stocks to sell short. The high CTB reduces the incentive to sell AMC stock short, thus preventing the downward pricing pressure that would cause the convergence of AMC and APE shares.

UPDATE: August 24, 2023 AMC implemented a 1-for-10 reverse stock split, meaning for every 10 shares of AMC stock owned, one new AMC share would be issued (as a replacement of old shares, not as an additional share). August 24, 2023 was also the last day of trading for the preferred shares, APE. On August 25, 2023, share of APE were converted into AMC stock. Because there was no reverse split for APE shares, the conversion rate was 1 APE was worth 1/10th of the AMC stock.

Finally, at the close of trading on August 24, 2023 we observed the convergence of APE and AMC share prices. APE shares closed at /$1.42 and AMC shares closed at $14.37. The slight difference between the price of 10 APE shares ($14.20) and the AMC share price of $14.37. Taking into consideration bid-ask spreads and the transaction costs associated with shorting APE shares, it would appear that the prices had converged sufficiently to eliminate any riskless profits.

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