Current Price: $2.26 + $0.76
Target Price: $4
Expiration Date: March 14
I am writing this post mostly as a reach-out to SSI subscribers in order to understand why this 30% fully hedged spread between APE and AMC exists when both stocks are set to convert into a single one by mid-March. The arbitrage trade I am referring to is fairly simple. Here is one example:
- Long APE at a cost of $2.26/share.
- Long $4 AMC March Put at a cost of $0.76/share.
- Total investment of $3.02/share.
- Total pay-off of $4/share after the Put option gets exercised and APE converts into AMC.
- That’s 30% return in a month.
That looks too good to be true for a widely-covered situation, and I would love to understand why this spread exists. A similar setup can be achieved with different option exercise prices and expirations.
I have covered the early days of this arb back in September, noting that it was unactionable at the time due to expensive borrow/options and lack of catalyst for the spread to collapse. But now the situation has changed with the shareholders set to approve the conversion of all of APE into AMC on the 14th of March and this way eliminate the spread between the two. For more background leading to this arbitrage opportunity, please refer to a really well-written piece by Andrew Walker. In a nutshell, AMC and APE are economically identical securities and have equal voting rights. APE has traded well-below AMC as the former was continuously used as currency to raise fresh equity, whereas the latter is a meme stock with zero borrow availability. But then in Dec’22, creditor Antara agreed to exchange $100m of debt into APE shares. In return, the company agreed to hold a vote to collapse the share class structure and convert APEs into AMCs. The vote is sure to pass as there are almost 2x more APE shares than AMCs and the non-votes count is favorable to APE holders. The meeting date has now also been set and the case appears to be fully derisked.
The spread on this trade (long APE + long AMC puts) has temporarily widened on several occasions but mostly stood at low single-digit percentages. Over the last few days, it has shot up again with the increases in AMC price.
My theory for the spread is that the spread is wide due to uncertain timing till new AMC shares are delivered to the current APE shareholders. In other words, arbitrageurs might be unable to close their long APE and short AMC (through options) positions at the same time. The vote is set for the 14th of March and the proxy indicates that:
We expect the APEs to cease trading and be delisted from the New York Stock Exchange (the “NYSE”) shortly after the effective time of the Charter Amendment Proposals. If the Charter Amendment Proposals are approved, we currently expect the last day of trading of the APEs to be March 14, 2023.
If the Share Increase Amendment is adopted, it will become effective upon the filing of a certificate of amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware.
If the Reverse Split Proposal is adopted, it will become effective upon the filing of a certificate of amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware.
The exact date of when new AMC shares will be delivered in exchange for APE is not indicated anywhere in the proxy. I have no idea if the filling of the above-mentioned Certificate of Incorporation has to be done promptly after the vote or if the company has a few days/weeks of leeway. The certificate of the amendment itself is already included at the bottom of the proxy with the date left blank. And even if the certificated is filed promptly, how long would it take for the company to convert shares? E.g. in split-off transactions, the conversion of shares from one company to another normally takes about a week. Not sure if the same timeline might apply here as it is te same company, just different classes of shares.
If the new AMC shares are not received by the 17th of March (the option expiration date), the whole arbitrage might blow up. In the money put options would get converted into a short AMC position, but as there is no AMC borrow (and the fee stands at 600%), this short AMC position would simply get closed at market prices. And we might see the very last squeeze that AMC hodlers are dreaming about.
Buying options with longer expirations reduces this problem, but the spread also narrows significantly. The table below indicates spreads with various option expiration dates as well as different exercise prices.
Even the 5%-9% spread for April expiration seems juicy enough for a two-month holding period if this were really a risk-free trade. And till the 21st of April there seems to be plenty of time to receive the newly issued AMC shares and closed this arb.
Any other thoughts on why the spread is so wide here?
11 thoughts on “AMC Entertainment (APE) – Share Class Arbitrage – 30% Upside”
There is a credible lawsuit that was filed Monday, seriously threatening the timing here (could easily delay things by 60 days). That’s why the spread has been blowing out:
Thanks. No idea how I missed this when it is all over the news.
There is legal risk – some shareholders have filed in court to block the conversion vote. And even if they don’t succeed in blocking it, they may delay it enough that your puts expire before the conversion.
Well there is the shareholder lawsuit that could delay things — they asked for a 60 day temporary restraining order (TRO).
Yes, what Dendrite said. See Matt Levine’s article (Bloomberg) from yesterday. It explains the legal situation well. The plaintiff is asking for a 60 day delay in the transaction for now, in the hopes they can win their case and block the conversion.
So AMC should pop if a 60d TRO is determined by the court? Surely I would imagine that not everyone is set up to hold their AMC shorts for an extra 2 months?
Two things regarding this lawsuit – which I invite anyone better-versed than me in legal talk to comment.
1) AMC is contractually obligated to have this shareholder meeting within 90 days of their deal (Dec 2022), so a contract which has already been signed and delivered must be broken to give this lawsuit any credibility.
2) You see in Plaintiff vs Defendant on the first page that shareholders are theoretically suing themselves:
all other similarly-situated Class A stockholders of AMC ENTERTAINMENT HOLDINGS, INC.,
AMC ENTERTAINMENT HOLDINGS
Interested to hear an experienced legal opinion though. In my laymen opinion, this entire document was easy to read and just seemed like Allegheny is butthurt that APE holders get to make so much money. Side note, why does a pension fund own AMC?! Index makes little sense, no relevant index owns significant AMC.
****1) AMC is contractually obligated to have this shareholder meeting within 90 days of their deal WITH ANTARA CAPITAL (Dec 2022)…
AMC shareholders are allowed to speculate, as APE shareholders are speculating.
There is a lot of irony here, including that APE “shareholders” largely expect AMC to bankrupt itself, with or without the conversion.
As to the forward purchase contract, AMC also (currently) lacks the legal authority to issue more common shares.
I don’t understand the legal basis for having the Preferred and Common can vote together, as a single class.
If they are the same class, why wasn’t a vote by the common shareholders required to approve the issuance?
Though, AMC made it clear they vote together, “unless it is illegal.”
The lawsuit claims the combined vote, is illegal. Maybe the court will conclude shareholders should have sued in 2022 to stop the issuance.
“AMC Preferred Equity Units and common stock will vote together, unless Delaware law requires that they vote separately.”
if AMC is unable to consummate this transaction, for any reason, by say June, there will be significant going concern risks here. the co is burning $200-250mm a quarter and had 135mm of debt coming due in <12mos as of Sep22. cash balance was last 680mm, I believe. so assuming 135mm is circled to pay maturing debt, pro-forma for Dec qtr cash burn and one more quarter (we are almost in March after all), they basically have no cash. keep in mind covenant waivers expire post March`23 as well (hence the timing of this attempted deal), and they will almost certainly fail next test (June'23) imo if cash burn stays at current rates.
what im getting at is even running this trade outright long APE is fraught with risk as there is now increasing non-zero risk they snap file sometime in the next 2-3mos if the court delays/stops this collapse and then issuance of AMC shares ASAP.