RadioShack secured a financial lifeline on Friday, announcing a deal with major investors that pushes the Fort Worth-based electronics retailer from the brink of bankruptcy.
Under the agreement, RadioShack will restructure a portion of its debt and receive $120 million from investors led by shareholders Standard General and LiteSpeed Management. The deal provides needed funds to help the ailing retailer stock its inventory for the crucial holiday selling season.
But in return, the hedge funds have the right to convert the investment into equity in the coming months and gain a controlling stake in the company. Standard General would also be able to nominate four members of a reconstituted seven-member board of directors.
RadioShack, which warned last month that it might have to file for bankruptcy if it could not obtain new financing soon, hailed the deal as a “milestone” in its recapitalization efforts. It said the agreement would provide “additional near-term liquidity” and serve as a first step in its longer-term business transformation.
“We are pleased to complete this important step, which we believe positions us to continue to progress our operational turnaround,” said Joe Magnacca, RadioShack’s chief executive officer, in a prepared statement.
“We recognize that we will need to address constraints under our existing term loan in order to undertake a store base consolidation program and pursue other measures to reduce our cost structure,” he said. “This amended [credit line] provides time to pursue a longer-term restructuring. To that end, we are in constructive discussions with our term lenders, led by Salus Capital, toward additional steps to recapitalize RadioShack.”
Standard General led a group of lenders that acquired the asset-backed revolving credit line from GE Capital, General Electric’s lending arm, and agreed to loosen its borrowing terms. Standard General and Litespeed Management also agreed to provide $120 million to cash collateralize letters of credit for the company.
If the $120 million is converted to equity, which the company expects to happen, Standard General will be able to name four directors to the retailer’s board. RadioShack’s CEO and two independent directors selected by the company also would sit on the board.
Existing shareholders would own 20 percent of the company’s shares unless they buy more stock in a rights offering that is part of the aid package. Any entity acquiring shares in the offering would have its voting rights limited to about 35 percent of the stock.
While the moves may provide RadioShack with a financial cushion to last through the year-end shopping season, negotiations with lenders will continue. Under the agreement, RadioShack expects to refinance the new asset-backed credit facility by next March.
Standard General said in a filing last month that it was working to improve RadioShack’s liquidity ahead of the holidays. The fund, RadioShack’s 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.
The refinancing may provide the retailer with enough leeway to close a larger number of underperforming stores, helping the company consume less cash. 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.
Standard General emerged as a potential savior for the retailer in August, when Bloomberg reported that the hedge fund was in financing talks. The firm previously orchestrated a lifeline for American Apparel, another troubled retailer.
Since joining the company last year, Magnacca has been remodeling stores and revamping its product lineup in a bid to revive sales. The former Walgreen Co. executive has brought in a new leadership team and outlined what he calls the “five pillars” of a turnaround, including boosting efficiency and repositioning its brand.
So far, the plan hasn’t reversed RadioShack’s decline. Comparable-store sales — considered a key gauge of performance — fell about 20 percent last quarter, when the company reported a $137 million loss. The 93-year-old company has only reported one quarter of positive same-store sales in the past three years.
RadioShack said last month that it has liquidity of $182.5 million, including $30.5 million in cash. Without reaching a financing agreement, “we may not have enough cash and working capital to fund our operations beyond the very near term, which raises substantial doubt about our ability to continue as a going concern,” the company said.
Staff writer Steve Kaskovich contributed to this article, which includes material from Bloomberg News.