Batbeer2,

Nice write up. Everything makes sense. If you were to play devil's advocate with this stock and your write up, is there any other risks or negative factors you see that are worth noting?

The math you present (the convertible debt assessment was explained well), is similar to what you find on a whopper investments, oddball stocks, or other microcap NCAV/Graham sites that look for value with a margin of safety.

What could happen to punish stock even further. It seems at this rate, the cheaper the stock gets, the better of a bargain. What could potentially kill this, other than continued depressed earnings which at this point aren't particularly important since there is a 40% discount to NCAV... Are we essentially getting the business for free?

Hi Davidash76,

Thanks for the kind words.

Re risks:

As with any stock, there is an endless list of risks. Unexpected litigation and tax issues/bribery two name two. I mention only risks specific to the company. I guess in this business there is a lot of wheeling and dealing with handsets, contracts and commissions. The company may be vulnerable in that regard (think WMT/Mexico).

The fact that it has been profitable doesn't mean it will be. Deals like this, will wreak havoc with your quarterly numbers. If it happens in the Christmas quarter, you have a serious problem.

Having said that, yes, you are getting the operations for free. Unless management destroys value (they're not doing that now) it will work out. I could have made a SHLD type case for this one based on the value of the real estate. That is not my cup of tea.

IMHO the core asset of the business is the guy with a Shack shirt who is willing and able to explain to you what the best dataplan is. They can stick that guy behind a counter in someone else's shop and get rid of their own shops without taking a hit to their core business. This would be great for asset turnover and ROE even at lower margins.

Great article - esp the convertible debt. The market seems to be spooked by what they perceive to happening to BBY. But BBY and RSH are different. The popularity of iphone/android has also crushed RSY as margins on smartphone given up by apple and samsung are much lower. Another catalyst could be the release of windows 8 phone and tablets.

On the positive side the company is profitable - has a great balance sheet and could be a buy out candidate from private equity of someone like BBY.

The holder of the convertible debt instrument has the option either to convert to stock at the specified price or to be repaid the full value of the bond at maturity.

The choice is not made by the company which sold the bond.

Hi 3rand,

It is my understanding that the bonds come due in august 2013. At that point, they will be converted into 16 million shares or the cash value thereof.

Were I to own some of these bonds, I'd prefer the cash. With cash, I don't need to register the shares and worry about slowly unloading them on the market......

Either way, they're worth a lot less than their current GAAP book value.

Is there some provision that the bonds can be put to the company at their nominal value before August 2013?

@ Pravchaw
Thanks for the kind words.

I believe 3rand is correct.

I haven't owned convertible notes but am under the impression that the face value of the debt -- ie. the amount the company owes -- does not become less just because the stock price has declined. Nor does the issuing company have the right to make the decision when and if to convert the debt to shares. Only the holder/owner of the convertible note has the right to make the conversion decision and they obviously wouldn't convert if the stock isn't at or above the conversion price.

Convertibles offer the buyer an opportunity for upside if, and only if, the stock price rises above the conversion price specified in the offer. At the same time, the debt associated with a convertible note isn't tied in any way to the current stock price. If it was, convertible notes would be incredibly risky for investors because issuing firms could have a strong incentive to cause a stock price decline after issuing the notes so that they could cash their debt out at pennies on the dollar.

Based on this understanding, RSH's debt is not going to decrease because their stock price has declined. Can anyone confirm this?

Thanks for clarifying 3rand & Aldandrea - I think this is consistent with the definition of convertible debt in wikepedia - "_In finance, a convertible note (or, if it has a maturity of greater than 10 years, a convertible debenture) is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features. Although it typically has a coupon rate lower than that of similar, non-convertible debt, the instrument carries additional value through the option to convert the bond to stock, and thereby participate in further growth in the company's equity value. The investor receives the potential upside of conversion into equity while protecting downside with cash flow from the coupon payments and the return of principal upon maturity.From the issuer's perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. The advantage for companies of issuing convertible bonds is that, if the bonds are converted to stocks, companies' debt vanishes. However, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into newshares

Overall it appear that RSH willl have to pay out the $375 principal by rolling over the debt at a much higher interest rate.

Looked further into the 10K. RSH sold _Million.

2013 Convertible Notes: In August 2008, we sold $375 million aggregate principal amount of 2.50% convertible senior notes due August 1, 2013, (the “2013 Convertible Notes”) in a private offering to qualified institutional buyers. The 2013 Convertible Notes were issued at par and interest is payable semiannually, in arrears, on February 1 and August 1.

Each $1,000 of principal of the 2013 Convertible Notes was initially convertible, under certain circumstances, into 41.2414 shares of our common stock (or a total of approximately 15.5 million shares), which is the equivalent of $24.25 per share, subject to adjustment upon the occurrence of specified events set forth under terms of the 2013 Convertible Notes. Upon conversion, we would pay the holder the cash value of the applicable number of shares of our common stock, up to the principal amount of the note. Amounts in excess of the principal amount, if any (the “excess conversion value”), may be paid in cash or in stock, at our option. Holders may convert their 2013 Convertible Notes into common stock on the net settlement basis described above at any time from May 1, 2013, until the close of business on July 29, 2013, or if, and only if, one of the following conditions has been met:







The 2013 Convertible Notes were not convertible at the holders' option at any time during 2011 or 2010. In 2011, we paid an annual dividend of $0.50 per share. This was a $0.25 per share increase as compared to the annual dividend we paid at the time we issued the 2013 Convertible Notes. This dividend increase triggered an anti-dilutive provision relating to the convertible notes that changed the conversion rate of the notes (“Convertible Note Anti-Dilutive Provision”). As a result, at December 31, 2011, each $1,000 of principal of the 2013 Convertible Notes was convertible, under the circumstances previously discussed, into 42.0746 shares of our common stock, which is the equivalent of $23.77 per share. Accordingly, conversion of all of the 2013 Convertible Notes would result in the issuance of approximately 15.8 million shares of our common stock.

Holders who convert their 2013 Convertible Notes in connection with a change in control may be entitled to a make-whole premium in the form of an increase in the conversion rate. In addition, upon a change in control, liquidation, dissolution or delisting, the holders of the 2013 Convertible Notes may require us to repurchase for cash all or any portion of their 2013 Convertible Notes for 100% of the principal amount of the notes plus accrued and unpaid interest, if any. As of December 31, 2011, none of the conditions allowing holders of the 2013 Convertible Notes to convert or requiring us to repurchase the 2013 Convertible Notes had been met.

In connection with the issuance of the 2013 Convertible Notes, we entered into separate convertible note hedge transactions and separate warrant transactions with respect to our common stock to reduce the potential dilution upon conversion of the 2013 Convertible Notes (collectively referred to as the “Call Spread Transactions”). The convertible note hedges and warrants will generally have the effect of increasing the economic conversion price of the 2013 Convertible Notes to $35.88 per share of our common stock, representing a 100% conversion premium based on the closing price of our common stock on August 12, 2008. See Note 5 - “Stockholders’ Equity,” for more information on the Call Spread Transactions.

-

Ouch, I stand corrected.

When the bonds come due, the holder receives NO LESS THAN PAR VALUE. [www.investopedia.com]

I withdraw this one form the contest. I'm sorry for this folks. Sloppy work on my part.

Thanks for pointing out my mistake.

Thanks for pointing this out. It's a great lesson learned. No shame in making it, I'm sure every great investor has confused the terms of different securities at times that have flawed a valuation one way or the other.

Nice post and responses all around. Very valuable.

Don't sweat it Batbeer2. I read everything that you write and very much appreciate your good analysis and writing.

It sure would be nice to be able to get a good read on RSH, huh? Such potential if they could just find a way to ignite demand.

Thanks for the kind words.

I'll try to dig up something better next time round.