Traders burned Friday by an arbitrage bet on AMC Entertainment Holdings Inc.’s stock got a lifeline when the movie-theater chain revised a plan to convert preferred shares that may enable it to win legal approval for the move.
The company filed a new version of the settlement over the weekend in a bid to address the problems identified. That gave a reprieve to investors who were caught wrong-footed with bets that the conversion plan would sail past a legal challenge and the gap between the two share classes would close.
Instead, a Delaware court rejected the proposal Friday, sending the preferred shares (ticker APE) plunging as much as 63% and the common shares rising 100% in after-hour trading.
Those moves widened the spread to more than $7 from just over $2 before the weekend news of the revised filing led to a reversal, narrowing the gap to around $4. The gap may narrow further depending on the exact language in the new filing, which is expected to be made public Monday.
Read: AMC Shares Surge on Court Ruling, With New Settlement Filed (3)
AMC created the preferred class to cash in on its meme-stock status and used it as part of the strategy to raise additional cash and keep the lights on. This proposal was approved in March but thousands of other retail investors opposed the move, arguing it would dilute their shares.
The Delaware court’s denial of the proposed settlement as presented is “a painful one” and not optimal for arbitrage funds, said Chris Colpitts, director of event-driven strategies at TD Cowen. It came as a big surprise to some investors not familiar with the legal proceedings who thought it was a final decision, he said.
Read: AMC Likely Salvages Scuttled Settlement After Terms Are Tweaked
AMC’s Friday rally was a short squeeze that was also compounded by options expiry and forced buying because of the options exercise, he added.
Still, Colpitts views this “as merely a stumble” toward the eventual approval of the settlement and conversion of APE units into AMC common shares.
Investors betting on the conversion were shorting shares of the common stock and snapping up AMC’s preferred units on the expectation that the price gap between the pair would vanish as the deal goes through, allowing them to capture the spread.
Read: AMC-APE Bet Looks Like Easy Money, But It’s Perilous for Traders
While it was supposed to be a straightforward bet — with traders expecting to reap a windfall in a short period of time — it hasn’t played out that way.
The expensive cost to short the meme stock’s common shares, paired with the volatility given its retail-trader following, also kept the spread wider than $2 since the APEs were distributed last year. The gap between the two classes of AMC had narrowed to $2.16 in February, but has been volatile given uncertainty related to if and when the shake-up would be complete.
--With assistance from Matt Turner.
(Updated with stock move and chart at close)