Analysis-Bed Bath's novel deal is no universal dodge-bankruptcy card
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[February 17, 2023] By
Shankar Ramakrishnan
(Reuters) - Debt-stricken companies seeking to buy themselves time for a
turnaround will find it hard to emulate Bed Bath & Beyond Inc's unusual
stock sale that staved off bankruptcy, legal and corporate finance
experts say.
The U.S. home goods retailer stunned Wall Street by clinching a deal
last week to sell preferred convertible stock and warrants to hedge fund
Hudson's Bay Capital Management and other investors that delivered it a
$225 million cash infusion and future payments, tied to financial
performance milestones, that could add up to slightly over $1 billion.
The investment spared Bed Bath from what it had said was "likely"
bankruptcy, after it received a notice of default last month from
JPMorgan Chase & Co pertaining to credit lines totaling $1.5 billion,
amid a drop in the value of the company's inventory.
It's unclear whether Bed Bath can capitalize on the breathing room to
turn around its business, which has been battered by competition from
other online and brick-and-mortar retailers.
But the deal with Hudson's Bay has raised the question of whether other
companies in financial distress, such as telecommunications equipment
provider Avaya Holdings Corp and discount retailer Tuesday Morning Corp
that filed for bankruptcy this week, could deploy similar financial
engineering to stay afloat.
Six legal and corporate finance experts interviewed by Reuters said it
will be challenging for other companies to structure similar
life-extending deals, because it was Bed Bath's popularity with
so-called meme stock investors that limited the potential risks for
Hudson's Bay.
Meme stocks are shares that individual investors often trade based on
social media posts rather than an analysis of a company's finances.
"Not all companies are meme stocks, so this strategy might not work for
other distressed companies," said Marcel Kahan, law professor at NYU
School of Law.
A spokesperson for Hudson's Bay declined to comment, while Bed Bath &
Beyond did not respond to requests for comment.
To secure the Hudson's Bay investment, Bed Bath offered a deal that
guarantees the hedge fund a lucrative return in most circumstances.
Hudson's Bay can convert the preferred stock and warrants it got from
Bed Bath to common stock at a roughly 20% discount, based on a
pre-agreed formula that looks at the last ten trading days for Bed
Bath's stock.
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A customer walks into a Bed Bath &
Beyond store in Novi, Michigan, U.S., January 29, 2021.
REUTERS/Emily Elconin/
Hudson's Bay will get this discount as long as the stock trades
above 71.6 cents, according to the terms of the agreement. Bed Bath
shares are currently hovering around $1.80, and its popularity with
meme-stock investors makes it less likely that they will drop below
the 71.6-cent floor, the experts said.
To pull off such a deal, other troubled companies would have to
convince investors that they enjoy a similar meme-stock status, the
experts added.
DILUTIVE DEAL
Hudson's Bay investment comes with risks that other hedge funds may
not be willing to take. Hudson's Bay has committed Bed Bath
contractually to buying back the preferred shares at a 15% premium
in the event of a bankruptcy, yet this protection may prove
worthless if Bed Bath runs out of money again, the experts said.
Credit ratings agency Fitch senior director David Silverman said few
investors would go for such deals. "It was a surprise that someone
was even willing to write a $200 million-odd check to invest in Bed
Bath's equity," he said.
It is not clear how much of the stock Hudson's Bay has converted and
sold since it inked the deal with Bed Bath on Feb. 6.
The deal is very dilutive for other Bed Bath investors, who will end
up owning 80% less if the company survives. Most bankruptcies end
with the equity of investors in a company wiped out, so Bed Bath was
able to justify the deal to investors as a last-ditch effort to
spare them from total loss.
Seth Basham, a Wedbush Securities analyst who had a $0 target on Bed
Bath's stock before raising it to $0.25 on the Hudson's Bay deal
news, said that all the retailer has accomplished is buying itself
some time to turn its business around against the odds. The company
has been rolling out store closures in a last-ditch bid to return to
profitability.
"They are on a wing and a prayer that there will be much value
created for the common shares as they would need to far exceed their
turnaround plan," said Basham.
(Reporting by Shankar Ramakrishnan in New York; Editing by Greg
Roumeliotis and Christopher Cushing)
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