The company landed a do-or-die rescue deal with Hudson Bay Capital Management that takes bankruptcy off the table for now, according to people familiar with the matter. Shares, which have surged in recent weeks despite the company’s dire situation, tumbled nearly 50% on Tuesday as the new financing will dilute existing shareholders.
The retailer, which has announced plans to close hundreds of stores, also said Tuesday it will shut dozens more stores as part of its plan to stay in business. The company now expects to keep open about 360 of its flagship locations, or about half as many as it had a year ago, and 120 Buybuy Baby stores.
The unusual financing deal was made possible by the high trading volumes in Bed Bath & Beyond, which is popular with meme-stock investors. The stock had rallied even as the company warned of bankruptcy that would wipe out shareholders. Movie-theater chain AMC Entertainment Holdings Inc. was able to take advantage of similar activity during the height of the Covid-19 pandemic to sell shares and avoid bankruptcy.
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Hudson Bay Capital appears to be betting that it will be able to cash in on the continuing trading in Bed Bath & Beyond shares and at the same time give the retailer funds it could use to dig out of its hole. Analysts said the company still needs to reverse its losses to avoid burning through the rescue, as it did with another lifeline it received in September.
The company has been on the verge of bankruptcy, having missed interest payments to its bondholders after having its credit lines frozen. The company has been closing stores and slashing jobs to stem losses. and has been trying to woo back vendors of brand-name goods.
Its board had been working with advisers preparing the restructuring plans, but opted for the deal with Hudson Bay Capital to avoid a likely liquidation in bankruptcy, some of the people said. The board is still exploring a potential sale of its Buybuy Baby chain, these people said.
Bed Bath & Beyond said Tuesday that it had priced an offering of convertible preferred stock and warrants that will provide it with $225 million upfront and as much as $800 million over time, with B. Riley Securities as sole bookrunner. It also received an additional $100 million credit line from one of its lenders, Sixth Street Partners.
Hudson Bay Capital, a $19 billion hedge fund, is providing most of the fresh investment, the people familiar with the matter said. The New York fund isn’t related to Hudson’s Bay Co., the owner of Saks Fifth Avenue and other retail chains. Bloomberg News earlier reported on the fund’s involvement.
Hudson Bay Capital has grown from under $1 billion over the past decade or so, thanks to strong returns and growing interest from investors. Founded by Sander Gerber, a former options trader at the American Stock Exchange, the firm has sometimes taken activist stakes in companies and also invested in distressed businesses.
The arrangement is less of a wager that Bed Bath & Beyond will quickly turn around its fortunes than a bet that it will avoid filing for bankruptcy this year and that its shares will trade at prices that allow the company to continue to tap the market and the hedge fund to cash out at a profit.
The new investors are buying $225 million in preferred convertible shares at a discount to the market price. Bed Bath & Beyond said Tuesday the convertible preferred shares can initially be swapped into common shares at $2.37. Given that the company’s common shares were trading at a little over $3 on Tuesday, Hudson Bay and other investors are acquiring them at a substantial discount.
The new investors are also getting warrants that over time allow them to buy about $800 million in additional equity securities from the company at likely discounted prices. The company can force the investors to exercise some of the warrants every month, bringing in cash for the business, as long as it hasn’t filed for bankruptcy and the stock price stays above certain levels.
The risk for Hudson Bay Capital is that it could end up saddled with securities that decline in value if the company fails to fix its business performance.
One analyst described the deal as a “last gasp” and said the stock was worth $0 a share. “We estimate that the additional capital provides the company with just a few more quarters of room to turn around its operations,” said Seth Basham of Wedbush Securities in a research report.
Shares of the company closed at $3.01 on Tuesday with more than 200 million shares changing hands—making it the most active on U.S. exchanges. The stock, which fell below $2 in January, had climbed near $6 on Monday as investors bet on the company’s survival. The shares were trading above $20 last March.Advertisement – Scroll to Continue
Andrew Murray, who lives in Morristown, N.J., started buying Bed Bath & Beyond shares over the summer, when they were trading around $5. “I bought the stock knowing I could lose it all and hoping for a miracle,” the 35-year-old said. “If this investment gives the company some immediate cash to survive, it gives me hope that I’ll be able to sell the shares at a profit.”
Proceeds from the latest rescue will provide a cushion, but most of the money will be used to repay existing borrowings. Bed Bath & Beyond had $1.13 billion in credit lines with banks and $375 million it had borrowed from Sixth Street in September. It also has about $1 billion in senior debt outstanding.
As part of the transactions Bed Bath & Beyond’s credit lines will be reduced to $565 million, with about $430 million in outstanding borrowings, the company said.
Chief Executive Sue Gove has been trying to woo back big-name suppliers and get inventory flowing onto shelves. She is also cutting costs by closing underperforming storesand reducing staff.
“This transformative transaction will provide runway to execute our turnaround plan,” Ms. Gove said in a news release on Tuesday. She said having a smaller fleet of stores would help the retailer with managing its inventory levels.
Several vendors said they remained skeptical of the company’s ability to remain solvent. The suppliers said they wouldn’t start shipping goods to Bed Bath & Beyond unless the retailer became current with outstanding payments they are due, paid upfront for goods with cash or letters of credit, or stopped burning through so much cash.
Bed Bath & Beyond said in a securities filing on Monday that it expects comparable sales to decline 30% to 40% in its fiscal first quarter. But it then expects sales to improve throughout the balance of the fiscal year, which begins in March.
The company said in the filing that it hopes to restore inventory to normal levels by the back-to-college shopping season, which typically starts in late summer.
The retailer incurred a $1.1 billion loss for the nine months ended Nov. 26. Net sales fell about 28% to $4.16 billion.