Is AMC Gearing Up a Takeover of RLJ Entertainment?

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Entertainment distributor RLJ Entertainment Inc. (NASDAQ: RLJE) normally trades fewer than 17,000 shares a day. As the noon hour comes to a close Monday, nearly 2.8 million shares have changed hands and the price has jumped nearly 58%.

The apparent cause of the excitement is a $65 million loan deal from a subsidiary of AMC Networks Inc. (NASDAQ: AMCX). According to a filing with U.S. Securities and Exchange Commission (SEC), AMC is lending RLJ $60 million for a seven-year term and $5 million on a one-year term in exchange for warrants  to purchase “at least” 20 million shares.

The longer term loan bears interest at 7% per year of which 4% will be paid in cash and 3% in common stock. The short-term loan bears 6% interest with 4% payable in cash and 2% payable in RLJ common stock. For calculation purposes, RLJ shares are valued at $3.00 per share.

At the end of the most recent quarter RLJ had just 4.71 million shares outstanding. Here’s what the filing had to say about the warrants that will be issued to AMC:

In connection with the AMC Transaction, the Company will issue to AMC the AMC Warrants, which will entitle AMC to purchase at least 20,000,000 shares of Common Stock (the “Warrant Shares”) with an initial exercise date as of the Closing Date. The first AMC Warrant for 5,000,000 Warrant Shares expires on the fifth anniversary of the Closing Date, the second AMC Warrant for 10,000,000 Warrant Shares expires on the sixth anniversary of the Closing Date, and the third AMC Warrant for 5,000,000 Warrant Shares expires on the seventh anniversary of the Closing Date. The exercise price of the AMC Warrants is $3.00 per share, subject to certain adjustments provided under the AMC Warrants.

The AMC Warrants include customary anti-dilution provisions. In addition, the third AMC Warrant also provides that the number of Warrant Shares subject to that AMC Warrant shall be increased to the extent necessary to ensure that upon the full exercise of the AMC Warrant, AMC shall hold at least 50.1% of the outstanding equity securities of the Company on a fully diluted basis (less the number of shares previously issued to AMC upon the exercise of the first two AMC Warrants and pursuant to the Credit Agreement). The AMC Warrants may not be offered for sale, sold, transferred or assigned without the consent of the Company.

That sounds like a takeover to us, and although it may not happen for some time yet, shares opened at $2.00 Monday morning and now trade at around $3.05 in a 52-week range of $1.02 to $4.95 and a consensus price target of $8.00 per share.