RadioShack’s Restructured Financial Deal To Provide Much Needed Cash For Its Operations

RadioShack’s (NYSE:RSH) stock price declined by approximately 12% after the company announced a new financial deal late Friday (October 3), which by design will give a controlling stake of the company to two hedge funds – Standard General and LiteSpeed Management. Standard General and certain other investors have replaced GE Capital as the lead lender under RadioShack’s senior secured asset based credit facility. Restructuring a portion of RadioShack’s debt, the agreement provides the company with $120 million in additional capital as the investors, led by Standard General and LiteSpeed Management, take over a revolving line of credit. Radioshack believes the deal gives it sufficient credit capacity to fund its inventory build for the upcoming holiday season and prevents it from going into bankruptcy.

In the last few years, RadioShack has been plagued by an eroding top line growth, declining gross margins, high inventory levels, a string of debt maturities and declining cash reserves. The company reported its tenth consecutive quarterly loss in Q2 2014 last month. Though RadioShack claims to be making steady progress with its turnaround initiatives (which were implemented last year), it has failed to show any significant financial gains so far. Radioshack’s stock price has declined by approximately 300% in the last one year, and its cash and cash equivalent is down to around $30 million. In its latest earnings call, Radioshack admitted that the current pace of its turnaround initiative is simply not fast enough to address the company’s near term liquidity needs. It was actively exploring options for restructuring its balance sheet and doing everything possible to avoid bankruptcy.

While the new financial agreement equips RadioShack with the much needed capital to run the company, it gives Standard General and LiteSpeed Management the right to convert the loans into equity in the coming months, if Radioshack achieves certain financial goals, and nominate four members of a reconstituted seven-member board of directors. The conversion is expected to give Standard General and Litespeed Management a controlling stake in RadioShack. The percentage of equity securities that Standard General and other investors will own will depend upon the level of participation of existing shareholders in the rights offering. Existing RadioShack shareholders will have the right to purchase equity securities at a price of $0.40 per common share equivalent.

Retail and mobility are the two key platforms that RadioShack uses to measure its business. The company claims to be making progress in its retail segment, which accounts for 50% of the sales. It is seeing customers responding positively to the key elements of its turnaround strategy such as the actions it has taken (so far) on reinvigorating the store experience, revamping product assortment and creating a stronger inventory position. However, RadioShack continues to suffer in the mobility segment which accounted for more than 75% of the decline in sales in Q2 2014. (Read: RadioShack: Hopes That New Products & Initiatives Can Lift The Mobility Business)

Our price estimate of $0.86 for RadioShack is now in line with the current market price. We maintain a cautious outlook on the company and estimate revenue of around $3.3 billion for fiscal year 2014. Our fiscal 2014 GAAP earnings per share estimate is -$1.74 as compared to the market consensus of -$3.71 (as per Reuters).

See our full analysis for RadioShack

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