Shares of RadioShack retreated 12 percent on Monday as investors took a cautious view of a financing deal announced late Friday that could give control of the company to two hedge funds.
The agreement restructures a portion of RadioShack’s debt and provides the ailing retailer with $120 million in additional capital as the investors, led by Standard General and LiteSpeed Management, take over a revolving line of credit.
The deal should provide a cushion to help the Fort Worth-based company get through the crucial holiday selling season and prevent a near-term bankruptcy filing. But analysts cautioned that the company will require further financial help and improved operational results to remain viable for the longer term.
“While we believe that the new liquidity is important, it serves as a short-term solution to a longer-term issue,” Michael Pachter, an analyst with Wedbush Securities, wrote in a note to clients.
He said the company may have trouble reaching a favorable debt restructuring early next year and still faces limits on closing underperforming stores. “We do not see light at the end of this tunnel,” he wrote.
RadioShack stock (ticker: RSH) declined 12 cents a share to close at 87 cents on Monday. The stock did not trade on Friday as the market awaited news of the financing deal, which had been reported by Bloomberg News. The company issued a news release about the agreement after the close of trading.
Under the agreement, Standard General is leading a group of lenders to acquire an asset-backed revolving credit line from GE Capital and loosen its borrowing terms. Standard General and Litespeed Management also agreed to provide $120 million to cash collateralize letters of credit for the company.
In return, the hedge funds have the right to convert the loans into equity in the coming months, if the company achieves certain financial goals, and then nominate four members of a reconstituted seven-member board of directors. Such a conversion, which the company expects to occur, would give Standard General and Litespeed Management a controlling stake in RadioShack.
Pachter estimated that the deal values RadioShack stock at 40 cents a share and could leave current shareholders with only 25 percent of the company.
In its analysis, BB&T Capital Markets said the financing package should help RadioShack avoid a near-term bankruptcy but comes at a “heavy price” to existing shareholders and may only serve to “forestall its ultimate demise.”
Last month, RadioShack warned that it might have to file for bankruptcy if new capital wasn’t secured soon as it reported a $137 million second-quarter loss and said comparable-store sales fell about 20 percent. It reported that its cash balance had narrowed to $30.5 million as of Aug. 2 and total liquidity, including available credit, was $182.5 million.
This report includes material from Bloomberg News.