With the festive season round the corner, the retailers across the globe are having busy time tanking up their shelves so that no customer walks out of the door without a shopping bag. This is the time when the retailers workout all their equations focused on sales. Hence, it is very common that they borrow finance in order to pileup their stocks with the hottest products of the year. Due to the high voltage shopping spree amongst the consumers during this time, different funding companies as well indulge in financing retail stores to cash on the incremental sales during this part of the year. Let us get you one such event which has caught the eyes of several analysts on the street.
The sacks of Radio Shack
RadioShack Corp. (RSH, Financial), the electronics chain in its tryst to fight bankruptcy, agreed with a group led by Standard General LP to refinance a $535 million credit facility to help it restock inventory before the holidays.
Standard General, a New York-based hedge fund company, led a group of lenders that acquired the asset-backed revolving credit line from General Electric Co.’s (GE, Financial) lending arm and agreed to loosen its borrowing terms, Fort Worth, Texas-based RadioShack said yesterday in a statement. Standard General and Litespeed Management LLC also agreed to provide $120 million to cash collateralize letters of credit for the company. The retailer said it expects those funds to be converted into equity later.
RadioShack began in 1921 as a mail-order retailer in Boston that catered to amateur ham-radio operators and maritime communication officers. It expanded into a wider range of electronics, and by the 1980s was once seen as a most visited destination for personal computers, gadgets and components that were hard to find elsewhere. In recent years, competition from Wal-Mart (WMT, Financial) and the robust e-commerce bigwigs has diminished its customer footfall.
This move would provide RadioShack with a good financial cushion to last through the crucial year-end shopping season. RadioShack has posted 10 straight quarters of losses, hurt by competition from e-commerce sites and discount retailers.
RadioShack’s $324.8 million face value of 6.75% unsecured bonds due in May 2019, jumped 7.7 cents on the dollar to 41.8 cents yesterday according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. This clearly reflects that all is not well at RadioShack’s end, and the funding from Standard General would prove to be an oasis in the desert.
Standard General said in a filing last month that it was working to improve RadioShack’s liquidity ahead of the holiday season. RadioShack and its largest investor also entered into a standstill agreement lasting until June 2015 that prevents it from taking over the board or proposing an acquisition or restructuring without RadioShack’s consent safeguarding the entity-ship of the retailer.
The funding equations
If the $120 million is converted into equity, Standard General will get the power to appoint four directors to the retailer’s board. RadioShack’s chief executive officer and two independent directors selected by the company would also sit on the board.
The existing shareholders would own 20 percent of the company’s shares if none of them purchase more stocks in rights offering that are part of the bailout package. Any entity acquiring shares in the offering would have its voting rights limited to about 35 percent of the stock which would mean serious business decision making capacity.
The refinancing gives RadioShack a fresh lease of life and access to more cash and greater flexibility, since the current debt agreement restricts how much money it can draw from the revolver, according to a Dec. 13 filing with the U.S. Securities and Exchange Commission. It also would provide the retailer with room for improvising its business by shutting a number of stores which are in the red zone in terms of sales, thus helping the company to effectively manage its cost to earnings ratios and yield better profits. RadioShack creditors blocked a plan earlier this year to shut 1,100 stores, forcing the retailer to limit the closings to as many as 200. But with the leverage of funding getting converted into equity mix it gives greater flexibility to the management to tailor the retail chains and improve returns.
Experimenting to break free from the shadow of bankruptcy
Standard General emerged as a potential life saver for the retailer last August. The firm previously orchestrated a lifeline for the American Apparel Inc. (APP, Financial), another troubled retailer.
RadioShack CEO Joe Magnacca has been remodeling stores and revamping its product lineup in a bid to revive sales. The former Walgreen Co. (WAG, Financial) executive, who took over Radio Shack last year, brought in a new leadership team and has outlined what he calls the “five pillars” of a turnaround, including boosting efficiency and repositioning its brand. So far, the plan hasn’t worked out much in reversing RadioShack’s decline. Comparable-store sales - considered a key gauge of performance - dipped about 20% last quarter. The 93-year-old company has only reported one quarter of positive same-store sales in the past three years which is quite appalling for such a legacy of retail business.
RadioShack backstage
RadioShack declared last month that it has liquidity of $182.5 million, including $30.5 million in cash. This means that without reaching a financing agreement, it would not have enough cash and working capital to fund the operations beyond the very near term, which raises substantial doubt about the viability of RadioShack.
For the refinancing, RadioShack was advised by Peter J. Solomon Co. and its legal counsel was Jones Day. The adviser for the company’s board was Lazard Freres & Co. (LAZ, Financial) & Plimpton LLP was Standard General’s legal counsel, and Blank Rome LLP advised the credit line investors.
RadioShack shares have traded under $1 in recent months, setting off the alarm bells and prompting the New York Stock Exchange to notify the company in July that it was falling short of compliance with trading requirements and guidelines. Two analysts set $0 price targets on the stock.
Final note
Whether RadioShack is revived or not is something which is still on the cards and only time will tell the final story. But, one thing is sure that the management is taking all roads to prevent the bankruptcy filing, if possible. Let’s stay tuned and keep watching.
