AMC Entertainment Holdings Inc. is straining under its heavy debt load at a time when the future of the theatrical film model is being challenged by in-home streaming options and pandemic-related closures. Now, one of the country's largest video steamers may be circling the exhibitor to take advantage of the opportunity.
Amazon.com Inc. approached AMC about an acquisition, according to a Daily Mail report, which would give Amazon a bricks-and-mortar link between its retail business, its streaming platforms and its production house Amazon Studios. The company has reportedly considered acquiring a theater chain in the past, and an acquisition deal could both spare AMC the pain of dealing with its $10.35 billion debt load and provide an option to stockholders otherwise facing cratering share prices.
While analysts generally agree that a deal is unlikely, the speculation illustrates the difficulties AMC faces in the wake of the pandemic.
AMC closed substantially all of its locations in March, driving revenue to a halt. It remains unclear when U.S. theaters in particular may reopen and whether moviegoers will return in strong numbers. As a result, S&P Global Ratings in early April downgraded the lender to a CCC- rating from a B rating, pushing the company deep into speculative territory.
"They're probably going to need to do something with their debt holders," an S&P Global Ratings analyst said in an interview.
As of the end of 2019, AMC's total debt to equity ratio was 8.53x, according to S&P Global Market Intelligence. And that was before the company shed 43.4% of its stock value in 2020 through May 8, compared to a 9.3% drop in the S&P 500 index. Rival U.S. theater operator Cinemark Holdings Inc. carried just 2.34x debt to equity at the end of 2019.
Some AMC bonds have been trading as low as 30 cents to the dollar, so the company may offer debtholders a package of new securities priced at a premium to the bonds to take the distressed debt off the market. While such an exchange could help AMC avoid filing for bankruptcy, it would still technically represent a default from an S&P Global Ratings perspective.
AMC's one-year probability of default score peaked in early April at 57%, according to S&P Global Market Intelligence data. The score takes into account both industry-related risks and share-price volatility.
AMC's stock recovered a lot of ground after its largest shareholder, Chinese media company Dalian Wanda Group Co. Ltd., dismissed rumors of a bankruptcy and AMC was able to issue $500 million in first-lien bonds at a 10.5% interest rate. Since then AMC shares have outpaced Cinemark's, and its probability of default has also improved to 18.9% as of May 8, below Cinemark at 23.7%.
However, with coronavirus-related closures persisting at least into the summer and AMC saying that it may not be able to secure additional financing, which it will need if it cannot open theaters before the end of July, the company is still likely considering survival options.
Given its leverage profile ahead of the pandemic, AMC in its Feb. 28 annual 10-K financial filing acknowledged its exposure to default, saying that its indebtedness could "increase our vulnerability to general adverse economic and industry conditions," among other risk factors associated with high leverage.
While an acquisition by a company like Amazon would allow AMC to avoid a default, analysts were dubious about the prospect. Wedbush Securities analyst Michael Pachter said in an email that there is little chance Amazon is seriously considering the acquisition, and Amazon could buy a smaller chain if it wanted theater operations.
While an acquirer would likely offer a premium to AMC's current stock price, even that may be unacceptable to AMC shareholders, B. Riley FBR analyst Eric Wold said in a May 11 note. A deal would not only require a studio such as Amazon to take on "significant physical asset and operating lease risks," but it would not likely appeal to AMC shareholders with the stock near all-time lows, Wold noted.
Shares in AMC spiked on the deal chatter, closing at $5.32 on May 11, up nearly 30% from a May 8 close of $4.10.