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Strategies & Market Trends : Lessons Learned

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To: Don Green who wrote (896)2/27/2023 2:23:20 PM
From: Don Green   of 922
The AMC And APE Consolidation Saga, Part 3

Bill Oxford/iStock via Getty Images

This article is written as a continuation/update based on two previous submissions, the AMC/APE Convergence Trade and AMC and Antara Jointly Loosen Lockup Restrictions, But Why?. If you are not familiar with the situation, I strongly suggest you read those articles first.

Feb 13-17th - As expected, Antara SellsWe left off by hearing that Antara Capital and AMC Entertainment Holdings, Inc. (NYSE: AMC) had agreed to loosen their lockup restrictions allowing Antara to sell up to XX Million shares at any time, and AMC could sell up to YY Million shares at any time. AMC later clarified that they would not sell until after their Q4 earnings report on Feb 28th (likely a couple days after that based on typical earnings blackout procedures).

Given that Antara had the ability to sell shares of AMC Preferred Equity units ( APE), and the economic incentive (they would make 300-400% on their sales based on a $0.65 purchase price), they clearly did and reported it on their Form 4.

In addition to their APE sales, they have a significant quantity of options-hedges in place. Via a series of Form 3 and Form 4 filings from Antara, I've managed to reconstruct a forecast of Antara's position in AMC and APE as of Feb 17th:

SEC Reports

My interpretation of Antara's position is that they have hedged their long APE position with March, April, May and June put options. They are heavily weighted towards the March expiry because they are (or as you'll soon see, WERE) confident that the vote would succeed and share consolidation would occur as expected on 3/14.

Feb 20-24th - And then the wrinkle...Late on Feb 20th, a class action suit was filed in Delaware Chancery Court requesting a temporary restraining order to prevent/delay the vote from happening and being effective on March 14th. I'm not a lawyer and have little interest in dissecting the merit (or lack thereof) of the case's minutia. However, procedurally, the existence of this suit added a considerable amount of uncertainty as to whether or not the vote (and share consolidation) would go forward as planned.

Information percolated through social media, court dockets, and traders. The market was slow to react, but ultimately people who were betting on the consolidation were forced to unwind their positions. The arbitrage spread between AMC and APE widened significantly, from $2.70 to as high as $4.30, finally settling around $4.00

Market Data

On Thursday Feb 23rd, the courts had a quick hearing between the defendants (AMC) and the Plaintiffs to discuss how the case would proceed. Due to the fast-approaching vote date, they agreed that there would be a hearing on March 10th. The hearing would either be for a temporary restraining order (TRO) or a Preliminary Injunction (PI).

As you will see with the Form 4's that will likely be disclosed later tonight (Monday February 27th), Antara closed the majority of their March put position on Thursday and Friday after hearing about the courts plan to move forward.

This action is incredibly telling because they are the largest active trader/arbitrager in this market, and they presumably have the best information. They have very little faith in the March deal close date and are selling their hedges at a loss, because holding them will result in them losing even more. (Note: losing money on the hedges will likely still result in a profit on this entire position.)

Based on the Form 3 & 4 filings and other public options data, Antara’s positioning before and after the 2/23 hearing can be forecasted and is anticipated to look like:

SEC Reports

The high strike puts ($5 / $6) had significant extrinsic value remaining and were closed out completely. For the $3’s, there was significant volume immediately after the hearing:

Market Data Providers

I strongly suspect this is Antara further reducing their March hedges, and anticipate that we will see this corroborated in their Form 4 filings to be released tonight (2 business days after the trade date). Antara seems to be leaving their $2’s, but likely weren’t sold because they simply aren’t worth very much anymore (~$0.08), and given the size of the position, any re-positioning would be constrained by market liquidity.

Feb 27 - And here we are...We're now all caught up, except there's a tweet circulating that purports to be a leaked email from the plaintiffs council. If genuine, the implication ( and follow up on twitter) is that AMC will still hold their vote, as scheduled on March 14th. However, if the vote succeeds, the share consolidation will not occur until after the results of the preliminary injunction ruling held on April 27th.

This "leaked email" may be entirely fabricated, or it may be genuine. If it is genuine, it creates the following sequence of strategic advantages that benefit the different major parties:

The plaintiffs get a significant amount of time to do discovery, which gives them a higher chance at being successful.The defendants get to hold their vote as scheduled. One might ask why is this important, and the crucial reason to me is because AMC and Antara lock up agreements expire immediately after the special meeting/vote (independent on whether the share consolidation is effective or not). If a TRO was granted and no vote was held, it makes slows down the timer on AMC and Antara share sales.AMC gets to segregate their issuance of shares from Antara's selling of APEs. Ultimately the result of this delay is that Antara will make less money and AMC will make more money. In the world where AMC and Antara are "competing to sell shares" after the original 3/14 vote + consolidation dates, Antara will now be selling pre-consolidation APEs on 3/14+, and AMC can issue post-consolidation AMC/APE shares in May/June. Most likely, AMC will get higher prices and Antara will get lower prices.This scheduling fits the narrative that (at first glance, was bizarrely) suggested by AMC's lawyers at the 2/23 meeting. They said to the judge something along the lines of "we would like to hold the vote and just not make it effective until later." A non-effective vote is useless, unless your lockup is contingent on holding the vote.What's next?The AMC-APE arbitrage spread currently sits at $4.25, which is basically higher than it has ever been since the announcement of the plan to consolidate the classes 2 months ago on December 21st. Anyone historically attempting to "arbitrage" the deal by buying APE and shorting AMC (either explicitly, or synthetically via options), has almost certainly lost money- unless they had impeccable timing to catch the random ups and downs of the spread.

At the moment of writing this article, there is no confirmation of the hearing dates going forward, but the market is pricing in a significant delay. If the rumors prove to be untrue, significant uncertainty will persist until the results of the March 10th hearing. If the rumor is true and confirmed, arbitragers will have to make the difficult decision to either close their position at a significant loss, or continue to chase the arbitrage by borrowing shares for an additional 2-3 months. Both of those are very unappetizing options and will likely result in the arbitrage spread widening.

The author continually trades in/out of various positions based on what he perceives as dislocations in the market's pricing and the implied probabilities of deal outcomes.

Acknowledgement: Credit to Jasper Chan for working on this article with me.
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