(Bloomberg) – Bed Bath & Beyond Inc. has lined up investors for an eleventh-hour cash injection that would allow it to avoid a bankruptcy filing, according to people with knowledge of the matter.
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The retailer, which is preparing to file for Chapter 11 after lenders declared it in default last month, plans to issue convertible preferred securities and warrants, it said Monday in a statement, as part of a deal that would raise more than $1 billion.
The company has taken orders from institutional investors that would cover the entire offering, said the people, who asked not to be identified because the details are private. A significant portion of the orders come from a lead investor, said one of the people, who did not identify the investors.
The company would raise $225 million immediately through the sale of convertible preferred stock and common stock warrants. The new money would allow the company to remedy a default on an asset-based loan and pay off outstanding debts it missed this month.
The company could raise an additional $800 million over time through the execution of warrants it issues.
In a statement, a Bed Bath & Beyond spokeswoman said the company “provided detailed disclosure earlier today and will not comment further due to regulatory requirements.”
“It saves them time but it doesn’t change the fundamental issues of the business,” said Joel Bines, who recently retired as global head of retail for consulting firm AlixPartners and leads now his own company, Spruce Advisory.
Bed Bath & Beyond’s cash flow declined and revenue fell year-over-year in the double digits for several quarters. “If there are buyers for shares that will most likely end up worthless – I guess it’s Bed Bath & Beyond’s fiduciary duty to sell those shares,” he added.
The company warned in a securities filing on Monday that it may have to file for bankruptcy protection even if the offer is successful. “Trading in our securities is highly speculative,” the company said. Additionally, he warned that he “may not be successful in implementing our transformation plan, including replenishing our inventory and increasing sales to customers, and we have historically underperformed in implementing implementation of management plans”.
Bed Bath & Beyond has warned of its solvency issues and has previously said it is considering bankruptcy. He defaulted on a line of credit and skipped interest payments on some of his debts, entering a 30-day grace period. Recently, he struggled to find interested buyers to help finance and eventually emerge from bankruptcy, Bloomberg News reported.
Even though its options appeared to be shrinking, shares of the company staged a volatile rebound from decade lows over the past week. Its stock price jumped 92% on Monday to close at $5.86 ahead of the announcement, then fell in the immediate secondary market.
The company has also named as interim chief financial officer Holly Etlin, a partner and managing director at consultancy AlixPartners. AlixPartners is one of many companies that have worked with Bed Bath & Beyond to cut costs and attempt a business turnaround.
Convertible preferred shares typically pay dividends and give holders the option to convert their equity into common stock. The offer is often popular among cash-strapped businesses looking for ways to raise capital.
The home goods retailer said it also plans to use some of the proceeds from the stock sale to rebuild its merchandise. But it’s an uphill battle. Even with a cash injection, it’s uncertain whether the company will be able to turn its business around, and the new funds could end up simply prolonging its long decline.
Company executives have said in the past two earnings calls that when they have enough merchandise on hand, sales improve – a sign, they said, that there is always a consumer demand for Bed Bath & Beyond’s products.
Many buyers have already abandoned the home goods channel and it will be difficult to win them back, according to suppliers and analysts. And it can be costly to upgrade stores that look tired and invest in marketing to let shoppers know if stores are becoming fully stocked again. Meanwhile, suppliers will likely remain reluctant to ship their products to the struggling retailer.
–With assistance from Andrew Monahan.
(Updates to say the company has lined up investors)
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