APE and AMC conversion

[TheBigShort]

Hello all,

I am starting this thread to try and figure out what I am missing on this AMC/APE conversion next week. If anyone has ideas on why this spread is not as tight as it should be please comment.

APE is going to converge with AMC on Friday Aug25th.
AMC will be giving 1 extra share to holders for every 7.5 shares held after the reverse split and before the conversion which would mean AMC will trade 13% lower than current spot (baked into the synthetics).

AMC current spot px is 4.1 and adjusted for the dividend (1 share for every 7.5 owned) that should put AMC @ ~$3.55.

APE is currently trading @ $2.27
AMC synthetic for Sep1 is trading @ $3.10

From the reports it is pretty clear that the conversion will happen this week so im not sure why the market is giving me this bet.

I understand that AMC has a squeeze potential so it should trade above fair but I still cant see how AMC is the alpha leg.

After the conversion the new AMC ticker will have 159mm shares. If we use current APE and AMC market caps that puts a combined total of 5.2bn. If i divide 5.2b by the 159mm shares then the fair value of the new ticker would be roughly $3.27 (not 10-1 share split adjusted).

The one concern i do have is APE is currently able to issue shares while AMC is not. So it is likely that APE is potentially fair value @ < $2 and after the conversion AMC will instantly drop to reflect that price.

That still does not explain the AMC synthetic that is trading $1 over APE with only 1 week to go!

If anyone has any ideas on why this trade exists, your input would be greatly appreciated.

For the record I am long quite a few of APE shares and long AMC Sep1 $2.5 puts as a hedge

 

[destriero]

Short the synthetic at 3.67 and lift APE at 2.27. Conversion takes place and your risk is a trade below 0.87 for the new shares. The litigation was settled. The arb is keeping the shares afloat and the risk is post reverse split AMC trades under 8.7. shitcos like this always plummet post-split.

So... my guess is that the street is pricing the post-split ticker under $10, but that doesn't make sense to me that dilution would impact the stock to that degree. Anything above 8.7 post split is alpha.

 

[destriero]

I may be missing something in the deal as I've only read the Bloomberg piece.

 

[newwurldmn]

I think the trade is super crowded and uncertain if it will happen.

if it doesn’t happen, you lose like 100percent.
But I haven’t been following it.

 

[destriero]

Short the synthetic at 3.67 and lift APE at 2.27. Conversion takes place and your risk is a trade below 0.87 for the new shares. The litigation was settled. The arb is keeping the shares afloat and the risk is post reverse split AMC trades under 8.7. shitcos like this always plummet post-split.

So... my guess is that the street is pricing the post-split ticker under $10, but that doesn't make sense to me that dilution would impact the stock to that degree. Anything above 8.7 post split is alpha.

0.87 pre split. 8.7 post.

 

[brownianpotion]

Short the synthetic at 3.67 and lift APE at 2.27. Conversion takes place and your risk is a trade below 0.87 for the new shares. The litigation was settled. The arb is keeping the shares afloat and the risk is post reverse split AMC trades under 8.7. shitcos like this always plummet post-split.

So... my guess is that the street is pricing the post-split ticker under $10, but that doesn't make sense to me that dilution would impact the stock to that degree. Anything above 8.7 post split is alpha.

Could you help me understand why you believe the market values $AMC below $10 after the stock split and conversion? Do you opine that the $APE shares are overvalued because of the arbitrage opportunity? If the ape shares are overvalued because of the arbitrage, shouldn't this mean the $AMC shares are undervalued? The September synthetic is priced at $3.10, this would suggest a post-split share price of $31 for $AMC.

Perhaps I have misinterpreted your stance. Are you examining the risk-neutral price in your scenario?

 

[MoreLeverage]

HTB rate on AMC is 900% interest.

 

[destriero]

HTB rate on AMC is 900% interest.

Doesn’t matter. You’re shorting the synthetic.

 

[destriero]

Could you help me understand why you believe the market values $AMC below $10 after the stock split and conversion? Do you opine that the $APE shares are overvalued because of the arbitrage opportunity? If the ape shares are overvalued because of the arbitrage, shouldn't this mean the $AMC shares are undervalued? The September synthetic is priced at $3.10, this would suggest a post-split share price of $31 for $AMC.

Perhaps I have misinterpreted your stance. Are you examining the risk-neutral price in your scenario?

I know nothing other than what has been stated here.

Pledging your APE purchased at 2.27 results in AMC shares. Let’s ignore the sweetener here. Buy 2.27 and short synthetic (Aug25 synth at 3.67) in AMC nets a 1.40 gain. Since APE is fungible into the conversion your AMC cost basis is 2.27. You have purchased pre-split AMC at 0.87 net.

The resulting position is long GME natural (converted APE) -> short synthetic AMC = a=conversion arbitrage. You also have the additional 1 share per 7.5 sweetener.

The thing splits reverse 10X? Now your cost basis is 8.7. I am probably missing something important here, but if I am not then perhaps the Street is valuing the post-split company under $10 due to risk of completion, some other factor…

 

[destriero]

I edited my last to emphasize the conversion. You’re not upside in AMC post conversion -> you have no risk to your cost-basis. Makes even less sense as I had initially (first post) forgotten about the synthetic exercise/assignment on Aug 26.

Long APE -> converts to AMC common -> long 100 AMC
Short synthetic AMC
Long APE -> short synthetic AMC = zero position post conversion

IOW your position result in no position post-exp and your 8.7 does not include the sweetener. The 0.87 pre and 8.7 post is simply to show the edge on the arb. The conversion is inviolate so the only risk here is completion.