After much speculation, troubled retailer RadioShack (OTC:RSHCQ) has agreed to a financing package backed by shareholder Standard General LP. The deal refinances a large chunk of the company's existing debt while also providing additional cash for the purpose of securing inventory for the ever-important holiday season. This is the lifeline that RadioShack investors have been waiting for, but it's important to realize that the company is still facing severe and likely unfixable problems. While RadioShack will be able to get through the holiday season intact, beyond that is another question entirely.
A look at the deal
Last year, RadioShack secured an $835 million financing package, including a $585 million credit facility from GE Capital, comprised of a $535 million line of credit along with a $50 million term loan, and an additional $250 million term loan from Salus Capital Partners, LLC. This credit agreement, which was backed by assets such as the inventory and accounts receivable of the company, came with restrictions. The number of stores that could be closed was limited, and GE Capital has kept a part of the available credit line inaccessible.
The new financing deal from Standard General removes GE Capital by acquiring the $535 million revolving credit line, and the loosening of borrowing terms gives RadioShack immediate access to additional liquidity. According to RadioShack, this will give the company the ability to fund its inventory build ahead of the holiday season, something that would have been difficult for RadioShack to do otherwise. Total liquidity, including cash and borrowing capacity, had declined to just $100 million by the time the deal was signed, down from $180 million at the beginning of August.
The second part of the deal is a $120 million investment from Standard General, along with other investors. This investment will be converted into equity securities if RadioShack meets certain conditions, including a modification of a supplier contract, at least $100 million of liquidity after the holiday season, and a viable long-term plan. There will be a rights offering allowing all existing shareholders to buy additional shares of the company at the same conversion price, but those providing the $120 million investment will own at least 50% of the company, or as much as 80% of the company if no other existing shareholder takes part.
Problem solved? Think again
RadioShack now has enough liquidity to make it through the holiday season, and it will be able to execute its plan to stock up on popular and interesting toys and gadgets in hopes that shoppers will visit its stores. But with a slew of competition vying for consumers' dollars, from big-box stores like Best Buy and Wal-Mart to online retailers like Amazon, RadioShack is going to have a very tough holiday season.
This additional liquidity buys RadioShack some time, but not very much, and given that the retailer has shown no signs of improvement since its previous refinancing package at the end of last year, there's little hope that the company will be able to turn things around. Comparable-store sales have been plummeting, down 20% during the second quarter of this year, the worst performance since the company's problems began. RadioShack's net loss over the past 12 months was $400 million, and the company has kept itself afloat by funding itself out of working capital. That's not a viable long-term strategy.
At the pace that RadioShack is losing money, the additional liquidity from the new financing package won't last long, maybe only a couple of quarters. It took less than a year for RadioShack to blow through its previous financing, and it likely won't be long before the company is once again staring into the face of oblivion.
If RadioShack is able to close a large number of stores, it could help slow the bleeding. But closing stores isn't free; RadioShack will need to terminate leases, and it's questionable whether the company can afford that option. If RadioShack was able to close a large number of stores earlier this year, when it had far more liquidity available than it does today, there may have been a chance that the company could be saved. But now, with a last-ditch financing effort buying RadioShack only a few months, a successful turnaround is the longest of long shots.