Surgeon General’s Warning

It’s been a decade (at least) since I purchased a pack of cigarettes, but as I recall, the warning on the side of the box didn’t tell me not to buy them. Not explicitly anyway.

Sure, the label alluded to the possibility that if I did buy them, and subsequently smoked them, I might die an excruciating death as a direct result at some unknowable future date. And as roundabout recommendations go, that’s a pretty powerful message.

But the warning didn’t come from the company and it didn’t literally say “Don’t buy these.” It just said something like, “If you buy these and smoke them, one day, when you have lung cancer, the decision you’re making right now might seem misguided, hindsight being 20/20 or whatever.”

AMC, on the other hand, told investors Thursday that,

We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock.

That, as it filed to sell 11,550,000 shares of common stock. Which, again, you’re cautioned against buying. Not by me. And not by some analyst. But by the company selling it. The same company which, on Wednesday, offered to give you free popcorn for buying the same shares it said you shouldn’t buy on Thursday.

But there was a caveat. Just like the Surgeon General says you shouldn’t smoke cigarettes unless you’re prepared to get lung cancer, heart disease, emphysema, and/or harm a fetus, AMC said you shouldn’t buy its common stock “unless you’re prepared to incur the risk of losing all or a substantial portion of your investment.”

Said differently, the only reason not to invest in AMC’s common stock is that, according to the company, the shares currently have virtually no connection whatsoever to the economy, the movie theater industry or the company’s own business, and as such might be expected to lose “all or a substantial portion” of their current value. Just like the only reason not to smoke cigarettes is that there’s a very real risk they’ll eventually kill you and/or harm your unborn child. So, it’s really up to you. Just how bad do you want that nicotine? Or that free popcorn?

Jokes aside — actually, no. Let’s just keep going with the jokes. Matt Levine (and here I am quoting him again, to my chagrin, but also with good reason because his Thursday AMC encore was even funnier than Wednesday’s initial screening) did some simple, fun math. Consider that,

One year ago today, AMC had 52.5 million shares of Class A stock outstanding (and 104.3 million total shares). After today’s offering, it will have 513.3 million shares outstanding. Ninety percent of AMC’s Class A stock, and eighty percent of its total stock, has been issued over the last 12 months. Some of that was desperation: In late 2020 and early 2021, with theaters closed due to pandemic and debt pressing on AMC, it diluted its shareholders by selling tens of millions of shares near its all-time-low stock price. Some of it, now, is hilarious joyful opportunism: In June 2021, with an army of retail “apes” enthusiastically bidding up the stock, it will sell millions of shares at its all-time high. In the first quarter of 2021, AMC sold a total of about 187 million shares in at-the-market offerings, for gross proceeds of about $597 million. That’s an average price of about $3.19 per share. Now it is offering 11.55 million shares, roughly 6% of what it sold in the first quarter, worth $722 million at yesterday’s close. It will get more money from this offering, for 6% as much stock.

That’s quite something.

You’d think AMC would have collapsed Thursday. (The shares, I mean. The company will collapse later. I’m just kidding. Maybe.) And it did. But then it rebounded (figure below), because what’s not to like?

For what it’s worth (which apparently isn’t much) AMC answered that question Thursday. While discussing “extreme fluctuations” in the stock, the company cited “strong and atypical retail investor interest, including on social media and online forums.” That’s a great line because from a legal perspective, it helps cover the bases, but it also serves as a “wink, wink”-type shoutout to Reddit.

While explaining why the stock is trading like a bat out of hell (for lack of a more poignant description), AMC also alluded to Robinhood, shorts, leverage, and hedging activity “related” to options trading, which is just a straightforward way of saying that having spent the last year honing their skills, retail investors are getting pretty adept when it comes to weaponized gamma.

By noon, AMC had raised $587.4 million, bringing the total for Q2 to $1.246 billion. CEO Adam Aron boasted of a “substantially strengthen[ed] balance sheet” which gives the company “valuable flexibility to respond to potential challenges and capitalize on attractive opportunities in the future.” The company’s bonds, which traded for pennies on the dollar in November, are at par (figure below).

Meanwhile, Jefferies’ prime brokerage unit banned the execution of short sells in AMC and GameStop. “Until further notice, Jefferies Prime Brokerage will no longer offer custody on naked options in GME, AMC and MVIS,” a memo seen by several media outlets said.

Lest we should forget, AMC isn’t the first company to advise retail investors against buying its own shares while offering them. Hertz did the same thing last summer. “There is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless,” Hertz said, in an infamous filing that was almost universally decried.

There are laws against driving a Hertz rental while being physically intoxicated. But not against Hertz selling shares to the mentally intoxicated while being bankrupt.

“As an intellectual proposition, most securities experts had always thought you could offer garbage for sale to the public as long as you said ‘we are offering you garbage, and you really shouldn’t buy this but you have a chance to buy it’,” former SEC chair Harvey Pitt said at the time. “No one ever really anticipated that people would be gullible enough to do that.”

That was a year ago this month. We’ve come a long way. Or, full circle. Or full-[insert politically incorrect Tropic Thunder reference].

But, as Levine reminded folks Thursday, “Hertz managed to sell $29 million worth of stock at an average price of about $2.08 per share before the SEC stepped in [and] its plan to emerge from bankruptcy involves a significant recovery for shareholders.”

What ultimately becomes of AMC’s (diluted) shareholders is anyone’s guess. Not all smokers get cancer after all. There’s some leftover joke here about the health risks associated with that orange “butter” they pump from a giant tub onto movie theater popcorn. I’ll let you write it.