AMC Entertainment's Biggest Shareholder Faces Scrutiny. Should Investors Worry?
Major shareholders can have a significant impact on a company's business and stock price, especially if one controls a majority of votes. In the case of AMC Entertainment (NYSE: AMC), that major shareholder is the Dalian Wanda Group, a large Chinese conglomerate that acquired AMC in 2012 in a deal valued at $2.6 billion and then took it public in 2013 but retained majority ownership.
Wanda's founder and chairman is Wang Jianlin, one of the richest men in China, whom Jeffrey Katzenberg once described as a "force of nature."
The stock closed on Thursday down nearly 50% over the past year, with recent reports about a clamping down by Chinese regulators on overseas investments, including some by Wanda Group, and a pre-earnings preview taking their toll. The stock was gaining ground on Friday morning, though, after the earnings report was released.
Wang and Wanda
In 1989, at age 35, Wang was appointed head of a state-owned residential real estate company in the city of Dalian, after previously working as a city official, according to an article from The Atlantic. According to the article, Wang soon turned the company into the Dalian Wanda Group, one of the first shareholding companies in Communist China. The company entered the commercial real estate market in 2000 by constructing "Wanda Plazas," large, mixed-use plazas in prime urban locations that usually included shopping, a high-end hotel, and cinema. The company now owns 109 Wanda Plazas.
Dalian Wanda Group now operates in four major areas: commercial property, luxury hotels, culture and tourism, and department stores. The company owns three hotel brands – Wanda Real, Wanda Vista, and Wanda Reign, and operates 99 department stores in major cities across China. In 2010, the company entered the "culture industry," encompassing, cinemas, film production, theme parks, film technology, print media, art, and travel.
Buying AMC
Already the largest cinema owner in China, Wanda set its sights on the U.S. market by acquiring AMC in 2012. It immediately embarked on a campaign to rip out seats at select theaters and replace them with plush recliners. Though this shrank theater capacity by roughly one-third, the company almost doubled its traffic per renovated theater, and this renovation strategy continues to this day.
After public equity offerings in 2013 and February 2017, Wanda currently owns a 57.95% economic interest and 80.52% of the voting power at AMC due to its ownership of B shares, which carry three votes per share.
Recent issues
On July 17, The Wall Street Journal reported that a leaked Chinese bank memo showed that Chinese regulators had raised issues with six of the Wanda Group's overseas investments. The crackdown by regulators on use of funds is reportedly part of China's attempt to prevent capital flight, which would weaken the Chinese currency.
It should be noted that Wanda is not the only reported target of Chinese regulators, and AMC is not Wanda's only recent foreign acquisition. Others include $3.5 billion for Hollywood production company Legendary Entertainment, $1.5 billion for Infront Sports & Media, and several others.
In addition to capital flight, Chinese regulators are concerned about debt levels at several large Chinese conglomerates. Wang gave a recent speech defending Wanda against "rumors" spread by people who "hope for chaos." The company recently sold 77 hotel properties and 13 tourism properties for $9.3 billion to pay off loans. Those tourism projects are the same theme parks Wang once declared would defeat Shanghai Disney. That seems to have been optimistic, as the parks are reported to not be doing well. Wang said that after the transactions, Wanda Commercial Properties would have 200 million yuan ($30 billion) in debt and 170 million yuan in cash, not 400 billion yuan of debt, as some said previously.
AMC responds
AMC on July 18 came out with a press release claiming Wanda has never been a source of funding for AMC's acquisition, Chinese banks are not a source of funding, and inter-company transactions between Wanda and AMC are minimal. Aside from a $10 million incentive Wanda paid certain executives and directors for closing last year's acquisitions, the only inter-company exchanges were Wanda reimbursing AMC for "immaterial" general and administrative expenses, and AMC paying Wanda dividends -- the same paid to AMC's public shareholders, the company said.
That being said, AMC has roughly $4.2 billion in debt -- $4.9 billion if you count lease obligations. Questions about the company's parent could make other lenders skittish, but that is conjecture. Right now, it seems there is a bit of guilt by association between AMC and Wanda Group.
Still, even prior to the announcement, AMC stock was under pressure from concerns about a slow summer box office and potential earlier video-on-demand windows. Having a parent company in the eye of Chinese regulators certainly didn't help current sentiment.
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Billy Duberstein owns shares of AMC Entertainment Holdings. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.