Idolized by some and criticized by others, AMC’s CEO Adam Aron divides opinions among shareholders.
- Adam Aron, CEO of AMC Entertainment since January 2016, has navigated the company through significant challenges, including acquisitions, declining movie attendance, and the COVID-19 pandemic.
- Despite facing increased debt and dwindling revenues, Aron’s leadership steered AMC to roughly double its revenue from 2016 to 2018, but the emergence of streaming services further challenged the industry.
- The COVID-19 pandemic severely threatened AMC’s survival, with revenues plummeting by 78% in 2020. Aron implemented various measures to address the crisis, including renegotiating leases and raising cash through equity offerings.
- The “meme mania” phenomenon in early 2021 saw AMC’s stock value surge, providing much-needed liquidity through equity sales, although it led to substantial dilution of shares.
- Despite ongoing challenges, including debt obligations and industry disruptions, AMC’s business fundamentals have improved, and Aron’s leadership remains optimistic about the company’s prospect
Adam Aron’s tenure as CEO of AMC
Adam Aron is an entertainment industry veteran with a robust background in private equity. Notably, he held positions as CEO of Starwood Hotels and Resorts and World Leisure Partners. Adding to his C-suite experience, Adam Aron served as a Senior Partner at Apollo Management L.P. and on the Board of Norwegian Cruise Line Holdings (NCLH).
Since January 2016, Adam Aron has served as AMC Entertainment‘s (AMC) CEO. Alongside the management team of the largest movie theater chain in the U.S., he played a pivotal role in acquiring cinemas such as Odeon, Carmike in 2016 and Nordic in 2017. These acquisitions significantly increased AMC’s debt burden. Between 2015 and 2016, AMC’s net debt surged from $1.8 billion to $4.2 billion, resulting in a net debt/EBITDA ratio rising from 4.0x to 7.5x.
Source: Company’s filings.
Despite the heightened leverage risk, this strategy aligned with AMC’s goal of establishing high-quality cinemas in prime locations at competitive prices. Consequently, revenues nearly doubled from $3.26 billion in 2016 to $5.46 billion in 2018.
However, movie attendance dwindled with the emergence of streaming services by late 2019. AMC responded by raising ticket prices to sustain profits, a move not seen since 2015. The elevated movie-going cost was further exacerbated by AMC’s already substantial debt load as ticket demand weakened.
AMC through the pandemic
In 2020, the world underwent a significant transformation due to the Covid-19 pandemic. For the movie theater industry, the closure of cinemas was devastating. Not only had demand been weakening in recent years, but AMC’s high leverage exacerbated the situation. Between 2019 and 2020, revenues plummeted by 78%, and by the end of 2020, the company reported negative total equity of $2.85 billion compared to $1.21 billion in 2019.
During this time, given AMC’s alarming cash burn rate, the company issued a statement indicating its intention to utilize a significant portion of its cash reserves between the end of 2020 and the beginning of 2021 to meet its obligations. Additionally, AMC emphasized the need to explore additional sources of liquidity as attendance levels failed to recover to pre-pandemic levels.
The situation was dire and there was a high probability that AMC would deplete its cash reserves and face bankruptcy. Consequently, AMC stock became heavily shorted, with borrowing fees exceeding 100%.
The “meme” miracle
By the end of 2020, AMC needed a miracle to navigate its extremely challenging liquidity situation. CEO Adam Aron and his team embarked on a series of measures aimed at addressing the crisis, including renegotiating lease payments with landlords, selling assets, entering into joint-venture agreements, and raising $37.8 million through an equity offering, which involved the dilution of 9 million AMC shares.
The problem was that, in the short term, these efforts seemed insufficient to alter the eventual outcome. It was at the beginning of 2021 that a miracle indeed occurred. With the onset of meme mania, AMC became the focus of a surge in retail investor interest, with individuals on social media platforms rallying behind heavily shorted stocks. This phenomenon resulted in massive short squeezes, notably in the case of GameStop (GME).
As a result of these short squeezes, the value of AMC shares, which had been priced at $13 per share post-split at the end of 2020, skyrocketed. In January 2021, they reached $70 per share, and the momentum continued. By June 2021, AMC shares had reached an astonishing $320 per share, marking one of the most significant short squeezes in history.
Source: TradingView
Capitalizing on the extraordinary appreciation of its shares and the heightened popularity of its stock, AMC launched a new at-the-market program. In 2021 alone, the company raised $1.8 billion in cash through equity offerings. While these offerings resulted in shareholder dilution and reduced ownership, they played a crucial role in bolstering AMC’s balance sheet and facilitating the renegotiation of its substantial debt burden.
During the period spanning 2021 to 2022, AMC CEO Adam Aron gained prominence among retail investors, who affectionately referred to him as the “Silverback Ape.” Aron’s popularity surged as he actively engaged with shareholders and encouraged their enthusiasm for the company’s stock.
It’s worth noting that during this time, CEO Adam Aron sold approximately $42 million worth of his personal AMC shares.
The neverending dilution
Despite meme mania, AMC still found itself desperate for more cash. With box office numbers still far from pre-pandemic levels and the company still not out of the woods, substantial revenue recovery seemed unlikely in the short term. Under the leadership of CEO Adam Aron, AMC’s management continued to rely on the strategy of raising cash through equity issuance.
As a result, Adam Aron and his team made the decision to keep issuing more equity despite the limitations imposed by its charter. As an alternative, AMC introduced APE units, a new class of equity that wasn’t common stock. This allowed them to raise capital without directly impacting existing common stock.
Anticipating that this move might negatively affect AMC’s share price, the company’s management jointly proposed a reverse stock split to “prop up” the share price and prevent AMC from trading at penny stock levels.
To sell more equity, AMC needed approval from its shareholders to convert its preferred shares into common shares. Throughout 2023, AMC secured majority approval for the conversion of the APE units, essentially giving the green light for equity issuance and subsequent stock dilutions.
However, despite the conversion being approved, AMC found itself embroiled in a lawsuit brought by a shareholder alleging malpractice by the company in the conversion process. The case dragged on in court, becoming a prolonged legal saga
In the meantime, AMC common shares and APEs were trading at significantly different prices, attracting arbitrage traders who saw an opportunity to profit from the situation. AMC stock faced intense selling pressure once again, with borrowing costs exceeding 900% at one point.
At the beginning of August last year, when the court finally authorized AMC to execute the conversion of the APEs into common shares and proceed with the reverse stock split, the market reaction was overwhelming. Despite knowing that this would lead to significant dilution in the coming months, AMC shares plunged by 73% in less than a month.
And the decline hasn’t abated. AMC shares have already fallen by 93% in the last twelve months. Meanwhile, AMC reported that it had raised $832.7 million in cash over the course of 2023.
Source: table by Seeking Alpha
AMC these days
Despite reaching its all-time lows, AMC’s business fundamentals are at their strongest since the COVID-19 pandemic began even though there is still a long road ahead before AMC fully recovers. CEO Adam Aron emphasized in an interview with The Hollywood Reporter that, given the current situation, restructuring the company and filing for Chapter 11, as Regal Cinemas did, would be “unconscionable.”
“One of the things I’m very proud of is that going into the pandemic, AMC was in very strong position.” said the CEO. “Having said that, and it’s not just me who thinks it, AMC has been more creative and more successful in trying to cope with COVID than just about any exhibitor in the planet,”
The recovery of the movie theater industry to pre-pandemic levels has been hindered by the Hollywood writers’ strikes over the past year, causing costly delays in film production. This has partly contributed to the underperformance of AMC’s shares.
According to Wall Street consensus, AMC is expected to report revenues of $4.49 billion throughout 2024 and $5.12 billion by the end of 2025, surpassing pre-pandemic revenues, which topped $5.02 billion in 2019.
Source: Seeking Alpha
Even with approximately $2.58 billion in cash used for operations over the past four years and a relatively high balance sheet leverage, the cash infusion from equity sales has prevented AMC from filing for Chapter 11. Bankruptcy, it seems, is no longer imminent.
However, AMC faces pressure as it will have $2.89 billion in debt coming due in 2026. In 2023 alone, AMC paid $421.2 million in interest on its debt. While bankruptcy could eliminate this interest, it would also wipe out AMC’s shareholders, including CEO Adam Aron, who remains one of the company’s major shareholders.
The verdict on AMC stock
CEO Adam Aron’s leadership has faced scrutiny in his almost decade-long tenure at the helm of AMC, particularly regarding his initial decisions, which led to AMC over-leveraging itself through expansion into Europe.
However, AMC needed to diversify its theater portfolio in an industry like movie theaters, where growth is typically stagnant, and innovation is often viewed as a threat. Under Aron’s management, AMC emerged as a global market leader, offering a high-quality product with significant potential for cash flow generation.
The major obstacle, however, was the onset of the COVID-19 pandemic, which struck just as AMC began to reap the benefits of its expansion efforts. The combination of declining revenues and high leverage created an almost untenable situation for the company. The company might have faced bankruptcy without the meme frenzy, which helped AMC raise equity through crowdsourcing.
In light of these challenges, I believe Adam Aron took the necessary steps to ensure AMC’s survival and protect its shareholders’ interests, even if it meant diluting the company’s float in exchange for cash.
I remain optimistic about AMC’s prospects under CEO Adam Aron’s leadership. The company has reported numbers closer to pre-pandemic levels each quarter and has successfully renegotiated its debt while raising additional cash through equity offerings.
Given the circumstances, I believe Adam Aron has effectively steered the world’s largest movie theater chain in the right direction. His strategic decisions have been instrumental in AMC’s survival, in my view.
It’s likely that if AMC had been under the guidance of a less experienced manager, the company would not have weathered the pandemic as successfully as it has under Aron’s leadership.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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