AMC And Antara Jointly Loosen Lockup Restrictions, But Why? (NYSE:AMC)

This article is intended to be a continuation on my commentary and discussion of the AMC APE convergence trade. I suggest readers have a look at that prior to reading this.

AMC’s new 8K

On Feb 9th, AMC Entertainment Holdings, Inc. (NYSE:AMC) released this 8K. Here are the two main pieces of new information that it contained.

• The deal with Antara Capital only closed on Feb 7th. While the deal was announced back on Dec 22nd, it was subject to an HSR waiver. I (and most market participants I know) had assumed that the deal had already closed in late January – likely prior to the PRE14 release by the company on Jan 27th. This is surprising, but by itself doesn’t really mean much.
• Antara and AMC agreed to allow each other to sell a significant number of AMC Preferred Units (APE) immediately. Their prior agreement required them both to hold their shares until after the special meeting date (tentatively set for March 14th). With this announcement, Antara is allowed to sell up to 26 Million shares, and AMC is allowed to sell up to $140 Million worth of shares (around 60 Million shares at current prices).

What this all means

Scenario 1 – Selling Early

The most likely interpretation of what AMC and Antara are doing is that they’re preparing to sell some of their holdings “earlier than expected,” specifically while the price of APE (and in some sense AMC) are still relatively elevated. One must remember that for AMC, the whole purpose of this exercise was to allow them to issue equity to the market and raise funds for corporate purposes. There’s a world where they would rather “play it safe” by raising $140M now, with APE prices at $2.50/share, versus waiting until after the March 14th vote date in case shares may be below $2.50 per share.

Likewise Antara, who purchased about 250M APEs at about $150M, would normally have to wait until after March 14th to sell their shares. By being able to sell 26M shares at around $2.50, they’ll essentially get about $65M, and reduce their “cost basis” of their remaining APE shares to $0.40 each. This significantly de-risks their position and generates more profit on the deal.

If this scenario is what’s playing out, one can/should expect the DEF14A (definitive proxy) to be released in the next few days (between Feb 10th and Feb 15th). Once the DEF is released, arbitragers will have a strong case to be buying APE and shorting AMC to profit from the near-certain convergence of the spread (the DEF release finalizes a lot of uncertainty for arbs). The DEF release, and buying of the arbs, will drive the price of APE up.

Simultaneously, AMC and Antara will likely take advantage of this buying interest in APE and sell into it, causing it to trade lower. My view is the amount of selling from Antara/AMC (~85 Million shares) will exceed the amount of arb buying, and we will settle lower than $2.25.

Scenario 2 – Hedging Deal Risk

A more complicated (perhaps sinister) interpretation of what’s happening is that AMC is worried that their proxy is not going to be approved by the SEC. The one piece of information that supports this theory is the fact that they filed the PRE14 on January 27th, which gives the SEC 10 calendar days to flag the PRE for comments. If by Feb 6th, they have not received notice from the SEC (silence counts), they can immediately flip the PRE to a DEF (definitive) which locks the vote in place. Not filing the DEF on Feb 6th, 7th, etc. would be due to two reasons:

1. The SEC has already flagged the proxy for comments/review, which could put the deal in jeopardy.
2. The company is intentionally delaying the DEF filing (which is disadvantageous because it gives the SEC longer to potentially flag it for review).

If the SEC has flagged the PRE for review, this could cause AMC to be worried that this deal isn’t going to happen. If the deal doesn’t happen, they can’t issue equity (at a reasonable price), and that’s a problem for the company. So, there’s a world where in response to hiccups in the PRE14, the company has mutually agreed with Antara that both can sell a bunch of shares right away, to hedge the fact that this whole thing might not happen.

I can think of at least three benign reasons why the PRE/DEF filing didn’t happen as expected on Monday. One would be that the Antara deal didn’t close until Tuesday Feb 7th, and it would make sense that they would want that deal to close prior to declaring the PRE into a DEF. A second reason would be that they historically (at least last time) filed their PRE on a Friday afternoon, and filed their DEF two Friday’s later (14 calendar days)- they’re just following their typical workflow. And a third would be that they’re very comfortable and confident with their PRE filing that they don’t mind delaying, because they have nothing to worry about with regards to the SEC comments.

This scenario also creates some potential legal issues with respect to selling shares. If, in fact, the SEC has flagged their PRE for comments/review, and AMC/Antara have sold shares in response, there’s a case to be made that those sales are being made with non-public information. Insider trading/etc. situations are always very tricky, with no clear black/white rules.

Scenario 3 – Signaling

I barely want to include this scenario, but it always comes up from people who seem to try to “look at the bright side” to support their position. There’s a world where neither AMC nor Antara intend to sell shares early, and this filing is only being made for signaling purposes to cause markets to react in some strange way. I think the chance of AMC/Antara going through the trouble of releasing their share restrictions, and then subsequently not using it, is exceptionally slim.

Putting it all together

I think that scenario 1 that I laid out is by far the most likely. In fact, it’s very possible the DEF has been released prior to this article being published (I’m submitting it Thursday night, but it probably won’t be live till midday Friday or later).

However, if we don’t see a DEF released in the following days, scenario 2 starts to become more likely, and eventually becomes the leading candidate. Absent any news, my estimate is that the switchover would happen around Thursday/Friday Feb 16th. At that point, with no DEF released, I’d be thinking Scenario 2 is more likely than Scenario 1. Let’s also sprinkle in Scenario 1.5 where they have released the lockup restriction, know there’s a delay, and won’t sell until after the delayed DEF comes out to avoid scrutiny associated with their share sales.

The result of either Scenario 1 or 2 is that there will be significant selling pressure on APE, to the tune of 100 Million shares. That is a very large quantity of shares, likely far more than the quantity of arbitragers that want to buy APE (and short AMC), and thus the net effect will pressure the APE shares and send them lower.

As always, I welcome your suggestions, corrections, and debate in the comments below.