The deathwatch has been postponed. RadioShack (NYSE:RSHCQ) will survive another Christmas. How much longer it has to live, though, is anyone's guess.
Hedge fund Standard General, the electronic gadgets retailer's top shareholder, stepped in to save it from all but certain death by agreeing to lead the refinancing of a $535 credit facility with General Electric (NYSE:GE) and to provide $120 million to bolster the company's liquidity.
While some analysts had believed RadioShack would seek out bankruptcy protection as a means of achieving a turnaround, Standard General apparently felt there was some worth still to be found in its operations and has set the stage for a recapitalization that is expected to be completed by 2015.
Following a second-quarter loss of $137.4 million that saw comparable-store sales plunge 20% from the year-ago period, RadioShack said it was "actively exploring options for overhauling our balance sheet and are in advanced discussions with a number of parties." That proved to be Standard General, which said late last month it was trying to improve the retailer's liquidity.
On Friday, RadioShack confirmed Standard General would replace GE as the lead lender on its senior secured asset based credit facility.
Just as noteworthy is the $120 million the hedge fund and fellow investor Litespeed Management are extending to the retailer to cash collateralize letters of credit that it anticipates will be converted into equity in the coming months so long as a supplier contract is modified; it has at least $100 million of cash and borrowing capacity by Jan. 15, 2015; it develops a fiscal plan for the following year; and it executes a rights offering that gives shareholders the opportunity to purchase additional common stock at a price of $0.40 per share.
The markets didn't seem to like the news all that much, dropping the stock some 10% in midday trading on Monday Oct. 6, the first day of trading following the announcement.
If the $120 million in debt financing is converted to equity, the hedge fund gets to name four directors to RadioShack's board, in addition to which CEO Joseph Magnacc and two independent directors the company can select will also serve. RadioShack said it intends to move forward with the rights offering later this year or in early 2015.
Giving the retailer greater liquidity for the holidays ought to allay any fears among vendors that RadioShack won't be able to pay them. It also holds out the hope that the company will achieve its plan to close as many as 1,100 stores.
As it works to transition away from reliance on mobile devices, which have been an anchor on its performance, RadioShack ran into a roadblock to its ambitious consolidation plans in the form of lenders who worried that closing so many stores would inhibit their ability to get repaid, regardless of how necessary it might be for the long-term survival of the company.
The rights offering, though, represents a substantial dilution of existing shareholders, who would see their stake in the company reduced to as little as 20% of the total if no one was to participate in the program, while anyone that does acquire equity in the transaction could have no more than 35% of the total voting power. Investors are getting the chance to purchase stock at a big discount to its current price, but any stock that remains outstanding at the end of the offer Standard General will buy up.
This isn't the first troubled retailer Standard General is stepping in to save. It recently revived hopes that apparel retailer American Apparel (NYSEMKT:APP) could survive the near-collapse that began with the ousting of its CEO.
After getting almost the entire board of American Apparel to resign, Standard General selected RadioShack's Magnacca as one of the new directors to clean up the place. It a curious selection because Magnacca ought to be focusing his full attention on saving his own company without having to worry about what's going on elsewhere.
As much as I shop at RadioShack for components for various electronic projects I work on, I've been predicting for some time the retailer will see its last Christmas. While it once again defied my expectations by getting a lifeline at seemingly the last minute, unless it uses this opportunity to truly transform its business this could indeed be the last of the holidays RadioShack will ever see.
Rich Duprey owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.