AMC Entertainment CEO Adam Aron Sees “Opportunity” In Regal Legal Woes – Is There?

Adam Aron, amc entertainement, Breaking News, Cineplex, Cineworld, Movies, Regal Cinemas

AMC Entertainment CEO Adam Aron said a Canadian court ruling requiring its biggest rival to pay a hefty fine is an “opportunity,” leaving Wall Street and AMC’s own legion of retail investors wondering what he meant.

Last summer, in the midst of the pandemic, Cineworld, the UK-based parent of Regal Cinemas, scrapped a deal to merge with Cineplex of Canada, citing breaches of contract. Cineplex sued and just yesterday a judge awarded it damages of $1.24 billion CAD (nearly $1B US) and denied a counterclaim by Cineworld, which said it plans to appeal.

“A Canadian court just ruled that Regal/Cineworld, our largest competitor in the U.S./Europe, must pay nearly $1 billion USD in damages over the failed Cineplex merger. Will be appealed, but anything distracting or destabilizing our biggest competitor brings opportunity to AMC,” Aron tweeted along with an image of piles of cash.

He got some pushback. “Is that picture of the money you got when you sold your AMC stock?” was one response.

And “Does your Chief Financial Officer agree with you? You know, that guy who’s accountable for tracking cash flow, financial planning, analyzing the finances and giving financial strategy proposals? That guy formally known as a shareholder…. Did you ask him?”

They’re referring to Aron’s sale of $9.65 million worth of shares last week, soon after he unloaded a first tranche of stock for about $25 million. CFO Sean Goodman separately sold most of his shares. Aron had advised stockholders publicly on AMC’s last earnings call that he’d be selling shares for estate planning purposes and it wasn’t a big deal, but the extent of selling seems to have caught some investors by surprise. The company’s meme-stock attraction is all about investors holding shares come what may in order to squeeze short sellers.

The executive stock sales — combined with markets jittery over Covid breakouts and ahead of a Federal Reserve announcement today — knocked AMC share lower this week. They closed up Wednesday at around $25 amid a broad market rally but are still well off a high of $72 in June, the peak of the meme stock frenzy. (Shares of Cineworld, which is traded on the London Stock Exchange, fell 40% today following the ruling.)

Earlier today, Aron retweeted his initial tweet with a header: “It is important that those who care about AMC see and reflect on this consequential news that came yesterday from Canada. Potentially creates significant opportunity in many ways for AMC.”

Alicia Reese, an analyst at Wedbush Securities, said Aron’s comments suggest AMC thinks it can take market share from Regal/Cineworld — “since AMC has cash available for reinvestment and expansion, while Cineworld is likely to pay handsomely for its failed merger with Cineplex.”

“He may also be implying that AMC is interested in acquiring some Cineplex assets,” she said.

Anything that’s “distracting or destabilizing” to a competitor, including cash constraints, “could provide an opportunity for other players to take advantage of the situation,” noted Eric Wold of B. Riley. “Although we are early in the situation and there remain a lot of unknowns around the ultimate outcome of this litigation, I would agree that AMC’s improved balance sheet and cash war chest could provide an opportunity for the exhibitor to step into locations that could prove attractive should they need to be monetized.”

Others were skeptical. “Look, is there opportunity to gain market share? Yes. But the thing is that Cineworld is going to appeal and that could go on for a couple of years before the whole process is exhausted. We know Cineworld is going to kick the can down the road because they don’t have the financial flexibility to pay this,” said Eric Handler of MKM Partners. Cineworld “won’t sell asset at depressed prices until someone forces them to pay.” He said AMC still has work to do to get its own financial house in order. Aron “is trying to play up that AMC is going on the offensive” – with Regal and with a string of announcements, like taking cryptocurrency or issuing NFTs. “But is it adding to attendance? So far no.” He said AMC still has substantial debt on its books (about $5.5B).

“While his shareholder certainly want to see growth, I’m less certain that they will applaud too many acquisitions without significant debt repayment that could get AMC on track to resume its quarterly dividend,” said Reese.

The company continues to be a conundrum for Wall Street.

Retail investors from Reddit chatrooms rallied to AMC in January, defying short sellers betting against the stock. They pushed shares so high that they likely saved the company from bankruptcy and now make up the bulk of its investor base. Aron has engaged with them brilliantly on social media, with free popcorn and a host of initiatives and they’ve stayed with him seeing the stock fly as analysts shrugged and put their financial models to the side. But the price has been wobbling and the sharp tone following Aron’s sale of shares shows how carefully he needs to tread.

Reese has a price target of $7.50 on the stock based, she said, on its business structure, industry forecasts, and aggressive assumptions on market share gains. “Without a structural change, I do not see a fundamental reason for shares of AMC to remain meaningfully above our target. That said, AMC’s retail investors — the majority of its shareholders — are not basing their purchasing decisions on AMC’s fundamentals.”

Wold has a $16 price target. Handler’s is $1, around where the troubled stock was trading in 2020. “Until attendance can return to close to normalized levels, they are not going to be able to earn anything that would come even close to justifying their stock price… and it’s the retail investors left holding the bag.”

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