Hedge Fund Dips Overpriced AMC and Stocks Continue to Rise

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(Bloomberg) – Even before day traders on Reddit hiked shares in AMC Entertainment Holdings Inc. 1400%, Jason Mudrick told the company that it should take advantage of this wild rally by selling shares to stay in business.

Mudrik has now helped AMC do just that, effectively financing one of the company’s largest stock sales, buying the shares for $ 230 million, and then quickly dumping them on the open market, making a good profit in the process. Meanwhile, his firm told clients that it was selling because AMC was overpriced.

The stock selloff is the latest head-spinning twist in a movie theater saga that was on the verge of bankruptcy just a few months ago, only to be resurrected by an army of day traders who heck of rejecting old school conventions about what companies are worth. …

None of the events of the day stopped the rally, with stocks soaring more than 20% in premarket Wednesday, adding 23% to Tuesday’s gain. AMC fueled the optimistic atmosphere by saying it will reward shareholders with gifts such as special views and free popcorn.

The quick sell-off was a win for Mudrick Capital Management, which specializes in distressed companies and backed AMC with a series of equity and debt deals last year. It is also an unusual role for a fund best known for trading distressed corporate debt.

Raising funds by selling shares to one shareholder is relatively rare in the US markets. It is almost unheard of for an owner to flip a stock immediately after buying it – usually the buyer is an existing stakeholder who is trying to send a signal of stability to the market. Mudrik’s role in the AMC sale is fleetingly reminiscent of public offering underwriters who buy shares with the specific intent of reselling them to investors.

Mudrik’s involvement “has been critical to AMC’s survival over the past year, so it’s no surprise they threw them a dice,” said Edward Moya, senior market analyst at Oanda Corp. “It was the perfect time to raise capital as the army of retail traders was thrilled that AMC was raising money for acquisitions and investments.”

They also apparently ignored Mudrik’s vague opinion of the AMC score. Despite the fact that on Tuesday, after it became known about the sale of Mudrik, the shares were briefly delayed, they still closed near the daily high of 32.04 dollars.

That’s more than four times the grim price the stock was selling at the end of 2019, and that was before anyone started talking about Covid-19 in theaters. While the loss of audience for streaming services was a big concern at the time, the threat persisted. The last time AMC stock closed at a higher level – and hardly – back in 2017.

AMC’s current market valuation trade peg is over $ 16 billion, even if the network has over $ 5 billion in debt and equity, down more than $ 5 a share.

“It’s clear that fundamentals don’t support the level of common stocks at all (which makes sense for the Reddit crowd),” said Mark Levin of Asterisk Advisors.

Bonds

Still, someone is making money after huge growth this year, including Mudrik’s investment firm in New York. In addition to acquiring shares, Mudrick Capital made a profit from buying bonds at a discount and converting part of its stake into equity earlier this year. How much ahead it is depends in part on how much Mudrick Capital received for its new stake of 8.5 million shares, which were acquired at $ 27.12 each.

A spokesman for Mudrick declined to comment, and AMC, based in Leawood, Kansas, did not respond to requests for comment.

The latest deal with Mudrik “will enable us to aggressively pursue our most valuable theater assets as well as other strategic investments in our business and leverage opportunities,” AMC CEO Adam Aron said in a statement. disclosure of information on the sale of shares.

No blocking

The company said on Tuesday that it had sold the shares to Mudrik with plans to “go on the attack” by acquiring theater assets, making strategic investments and cutting debt. Unlike some stock sales, the Mudrick deal had no minimum tenure. Instead, the shares were “freely tradable,” which meant that Mudrick Capital could sell the shares at any time and in any amount chosen.

The investment firm also benefited earlier this year from buying AMC debt at large discounts, purchasing bonds with secondary collateral at prices ranging from 7 to 20 cents per dollar, Bloomberg reported. These securities rose to about 70 cents in January. The hedge fund also held the AMC secured debt position.

Read More: Mudrick Capital Raises $ 200 Million on AMC, GameStop Bets

“The market didn’t believe that AMC could survive the downturn – we did,” Mudrik said in an interview in January. “With this rally, they have to start eroding their capital structure. AMC should register more shares, sell as many shares as possible and use cash to pay off debt. “

Day traders, commenting on public forums, understand that an investment company is hardly one of them. “Mudrik is definitely not a monkey,” said one commentator, using a term coined by Reddit users to refer to those who are optimistic about so-called meme shares. “In the end, it doesn’t matter because we can easily restore this dump before the market closes.”

But there were still questions about the type of placement and valuation of shares. With a lot of borrowing and double-digit coupons on existing bonds, “this is not an acceptable amount of debt,” said Matt Zloto, co-director of research on high-yielding US companies at CreditSights. “Depending on the type of acquisition the AMC is making, it could be positive if it increases cash flow and earnings enough.”

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