Monday, October 6, 2014

Very Good Analysis of Radio Shack Deal From Correspondent $RSH

A correspondent writes in about the Radio Shack deal,

"They state that the investors will put up $120MM cash to be used to collateralize lines of credit and that it is expected to be converted into equity. And in the next sentence they say 'Current shareholders will have the opportunity to participate in a rights offering at same conversion price.' So everyone's cash is going into the equity at $.40 per share, therefore the conversion of the cash collateral element of the deal would give the investors 300MM shares.

But if you read further down, they talk about issuing a minimum of 400MM shares and if no public shareholders participate in the rights offering, they will own 20% of the company’s equity securities, which given that there are 100MM out now, means that 400MM would be issued to the investors. So where do the extra 100MM shares come from – the answer must be $40MM in fees paid in shares. Note this language from the release: 'The $120 million investment is expected to be converted into equity securities representing (together with related fees payable in equity securities) not less than 50% of the Company's outstanding equity securities upon satisfaction of certain conditions.'

So if they get 100MM shares in fees, for agreeing to assume the first lien deal and amend it, and for putting up the cash collateral (whether that collateral has 1st or 3rd lien status is still ambiguous to me), then they have control of the equity of the company while having most of their investment in a first lien position (other than, perhaps, the cash collateral backstopping the letters of credit) and won’t be forced to convert their cash to equity unless the rights offering is done, the supplier contract is modified, and the company has $100MM of liquidity (before their money goes in) at 1/15/16.

So to net it out, their 'at risk' capital is primarily or maybe totally first lien, and worst case, they get a free look at the fourth quarter and whether the company can raise $120MM in a rights offering while securing a control position in the company, before they expose any of their capital to a pure equity risk. Maybe we have underestimated Standard General's negotiating acumen. If the Hail Mary play works and there is a sustainable business here at the end of the day, they have acquired enormous optionality in the equity while putting very little capital at risk of a permanent loss. Not bad. "
The other thing our correspondent points out is the desperation for liquidity that this deal fee shows. And, from my earlier post, we see that the company has been losing over $1MM a day for the past two months, which is the key issue for the company and shareholders, and which this deal does nothing to address. (Ultimately a question of store closures and the number of stores that are profitable.) And there is still no agreement with Salus to permit store closures!

1 comment:

eah said...

To put it mildly, RSH is a moldy brand. What is there to salvage? A possible turnaround story later -- doing what? -- seems like a tall tale. Can these people really not find better opportunities?