AMC and APE Shares Spread Widens Following a Court Ruling

The spread between the common stock price and the preferred stock price of AMC Entertainment Holdings Inc. widened on Thursday, reversing the trend that narrowed earlier in the week in favor of the preferred stock. 

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It and APE's preferred shares are listed under the ticker APE, and the preferred shares have been rising by up to 22%, while the common stock has been falling by up to 15%. As a result, this widening of the gap between the two shares put them at around $3.40, up from $2.34 Wednesday, which was their closing price. Bonds issued by AMC also fell in value.

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After the movie theater operator's motion to lift a status quo order was denied by the Delaware Court of Chancery, traders who were betting on the rapid conversion of the two units were dealt an unexpected blow. Several days after the company reached an agreement with retail investors regarding a stock conversion, the Court of Chancery denied the motion. 

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As a result, many investors are surprised, said Cabot Henderson, a merger arbitrage specialist at JonesTrading. "But let's hope they can schedule a hearing soon."

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Risk arbitrage traders looking to capitalize on the spread have been left uncertain because of the ongoing court case. Once the conversion is complete, they believe the price gap will disappear between the two share classes. It could delay the opening of the markets, forcing investors to hold their trades for longer - eroding the profits they may have made.

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Still, some analysts remain positive. The court decision likely stemmed more from the speed of the settlement than the merits of the terms, according to B. Riley's Eric Wold. In his research note, Wold said the hurdle was merely a roadblock rather than a roadblock.

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According to AMC's announcement on Monday, the company had reached an agreement with retail investors, and that agreement had enabled it to proceed with its plan, pending the court's approval, to trade the preferred shares for the common shares of the company in the fashion of a one-to-one exchange.

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In her Wednesday ruling, Vice Chancellor Morgan Zurn of the Delaware Chancery Court stated the parties do not demonstrate good cause as to why the status quo order should be lifted. Therefore, the motion is denied. 

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The court previously approved AMC's stock conversion and related proposals, but Zurn ordered the company not to carry out any changes until after a court hearing on April 27.

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As part of the judge's tentative agreement, the conversion will remain on hold until she formally approves it. In order to protect the interests of outside parties, such as investors not involved in the litigation, class action settlements require court approval, and she did not directly address the deal's merits.

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