Here's how legendary short-seller Jim Chanos is taking advantage of the arbitrage between AMC stock and the new APE shares

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Jim Chanos
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  • Famed short-seller Jim Chanos is buying AMC Entertainment's new preferred equity share class, dubbed "APE."
  • At the same time, Chanos is shorting AMC Entertainment's common stock, until the two share prices converge.
  • "They are economically the same security, and there seems to be a lot of confusion about that," Chanos said.

Legendary short-seller Jim Chanos sees a big opportunity in AMC Entertainment following the issuance of its preferred equity share class, dubbed "APE."

The hedge fund manager, who was short shares of AMC Entertainment last year, told CNBC on Tuesday that he initiated a new short position in the movie theater chain's common share class.

Yet at the same time, Chanos bought shares of APE, as he sees an arbitrage opportunity between the price of the two securities. AMC Entertainment stock currently trades at $9.56, while the AMC preferred equity share class trades at $7.20.

"That spread is economically an arbitrage," Chanos said.

Chanos expects that $2.36 gap between the two share prices to eventually close, as "they are economically the same security, and there seems to be a lot of confusion about that," he said. Chanos pointed investors to AMC's APE FAQ webpage, which clearly states that "each AMC Preferred Equity unit is designed to have the same economic value as a share of Class A Common Stock." APE shares have the same rights as AMC shares. 

AMC Entertainment issued the APE stock essentially as a stock dividend to its shareholder base, as it was not authorized by investors to issue and sell new common shares. But down the road, the APE shares are expected to be converted into common shares of the company and help the company raise money.

"The company can go out now and issue new preferred to finance itself or pay down debt or make acquisitions, but functionally the two securities are the same and I would guess the APES will be putting pressure on [CEO Adam] Aron if the discount continues to make it freely convertible sooner rather than later," Chanos said.

"I think they should be the same price or roughly the same...I'm counting on them to close [the price gap]. I think they'll ultimately be the same class. At the end of the day the economic interest in ownership is 1 for 1...they [APE] shouldn't be trading at a 30% discount" Chanos added.

While Chanos' expects to make money in his arbitrage trade, don't expect him to stay around long after the gap closes (if it does), as he had some choice words for Aron.

"Let's not forget Mr. Aron arrived here in January of 2016, and much of what got this company in trouble was his aggressive approach to the movie theater business from 2016 to 2019: taking on a lot of debt, making acquisitions in a business that was already declining. So, he's putting out a lot of fires here, but a lot of those fires he helped set," Chanos said.

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