AMC shares soar nearly 23% after fund buys and flips $230 million stake

FILE PHOTO: FILE PHOTO: An AMC theatre is pictured in New York

(Reuters) -A hedge fund that helped AMC Entertainment Holdings raise $230 million quickly sold its stake in the world’s largest cinema chain at a profit, according to a source on Tuesday, when the “meme stock” soared more than 20%.

The move by Mudrick Capital Management to flip 8.5 million shares of the movie theater chain immediately after buying them in a private placement from the company shows how Wall Street is getting bolder about making a quick buck off a trading frenzy that has helped fuel big rallies in several stocks favored by retail investors.

Easy money from the Federal Reserve has “created an almost video game-like atmosphere in the stock market and investing,” said Michael O’Rourke, chief market strategist at Jones Trading. “There’s money flowing everywhere and this is a great illustration of that.”

AMC said earlier Tuesday it issued 8.5 million shares to Mudrick, the chain’s latest share sale this year as it cashes in on a big jump in its stock in 2021.

Mudrick has sold its AMC stake at a profit, believing the company’s shares are overvalued, the source familiar with the matter said on Tuesday. Additional details could not be immediately determined.

AMC did not immediately respond to a request for comment on Mudrick’s divestiture reported earlier by Bloomberg News.

AMC said it would invest the proceeds in its existing theaters, which are set to benefit from a recovery in demand as more states lift COVID-19 restrictions on social gatherings.

“This can be a real way for AMC to grow again, creating immediate value for AMC shareholders,” Chief Executive Adam Aron wrote in a Twitter thread “This is not mindless dilution, but rather this is very smart raising of cash so that we can grow this company.”

AMC’s stock closed up nearly 23% at $32.04, leading a rally in other meme stocks.

The muted response in AMC shares to news of Mudrick’s flip “shows you that this isn’t a stock that moves on fundamentals,” said Kim Caughey Forrest, Chief Investment Officer at Bokeh Capital Partners LLC. “It’s a lottery ticket to the buyers of the stock.”

AMC’s stock is up more than 1,400% so far this year in a meme stock rally that has picked up in recent weeks, including video game retailer GameStop and other favorites frequently discussed on Reddit’s popular WallStreetBets forum.

GameStop shares, which rallied more than 1,600% in January, closed up more than 12%.

AMC has so far raised about $1.35 billion through share sales since December 2020.

Jason Mudrick founded London and New York-based Mudrick Capital in 2009 after leaving investment firm Contrarian Capital Management, where he had focused on distressed investing for eight years, according to the hedge fund’s website.

Mudrick’s firm, which managed $3.8 billion in assets as of last month, specializes in long and short investments in distressed credit, its website said.

Hedge funds like Mudrick will sometimes take down a share sale and quickly flip it as long as no lockup provision bars that for a specified period, said one U.S. based hedge fund.

“I don’t know if it happens every day, but it’s certainly a common practice.”

Sentiment around AMC was also supported by strong weekend box office collections in North America, led by John Krasinski’s post-apocalyptic thriller “A Quiet Place Part II,” one of the first major theatrical releases since last year.

The Memorial Day holiday is also expected to have boosted ticket sales as widespread vaccinations bring in more Americans to theaters.

The share sale shows that AMC is “obviously forward-leaning here and trying to be opportunistic,” said Mike Hickey, an analyst at The Benchmark Company. “There’s concern on dilution and there’s concern on leverage but if you can raise money … you’d be a fool not to.”

(Reporting by Aaron Saldanha, Ambar Warrick, Devik Jain and Medha Singh in Bengaluru and Mike Spector, Maiya Keidan, Sinead Carew and Ira Iosebashvili in New York; Editing by Shounak Dasgupta, Saumyadeb Chakrabarty, Jonathan Oatis and Richard Chang)