RadioShack Corp. (RSH) is talking with shareholder Standard General LP about getting a rescue financing package that could help the retailer stave off a bankruptcy filing, two people with knowledge of the matter said.
Standard General, a hedge fund that’s also orchestrating a lifeline for American Apparel Inc. (APP), is seeking to bolster RadioShack’s cash by issuing debt or equity, said the people, who asked not to be identified because the discussions are private. The firm also is working with RadioShack’s management to craft a plan that would avoid Chapter 11, the people said.
Without a capital infusion, the seller of phones, electronics and batteries will probably face a cash crunch next year, according to Moody’s Investors Service. RadioShack, based in Fort Worth, Texas, lost $98.3 million in the three months ending May 3, while same-store sales tumbled 14 percent.
“If no one else takes any kind of action, this is going to zero,” Anthony Chukumba, an analyst at BB&T Capital Markets in New York, said today in an interview. “Even if they are able to get this rescue financing and close a bunch of stores, it still is going to be an uphill climb.”
Standard General also is seeking to refinance RadioShack’s $250 million second-lien term loan, which is held by Salus Capital Partners LLC and Cerberus Capital Management LP, the people said.
Paying down that debt may give the retailer enough leeway to close a larger number of underperforming stores, helping stem cash losses. RadioShack creditors had blocked a plan to shut 1,100 stores earlier this year, forcing the retailer to limit the closings to as many as 200 instead.
Merianne Roth, a spokeswoman for RadioShack, declined to comment, as did Salus’s Emily Serafin and Standard General’s David Glazek.
RadioShack shares rose 19 percent to 86 cents in New York after Bloomberg reported on the potential Standard General deal. Before today, the stock had lost almost three-quarters of its value this year.
Separately, large RadioShack bondholders are working with financial adviser Houlihan Lokey to assess their options, according to two people with knowledge of the matter. The creditors hold some of RadioShack’s $325 million in 6.75 percent unsecured notes due 2019. John Gallagher, a spokesman at Los Angeles-based Houlihan Lokey, declined to comment.
Standard General, based in New York, owned more than 7 percent of RadioShack’s shares as of June 30, according to data compiled by Bloomberg. Since then, the firm has increased its stake to almost 10 percent, one of the people familiar with the matter said.
Helping save a troubled retailer wouldn’t be a first for Standard General, which was founded in 2007. Last month, it committed as much as $25 million in capital to American Apparel, the unprofitable chain that recently ousted founder and Chief Executive Officer Dov Charney. That included spending $10 million to purchase Lion Capital LLP’s high-interest loan.
As part of that deal, RadioShack CEO Joe Magnacca was appointed to American Apparel’s board, establishing a tie between the two struggling retailers.
Magnacca has been remodeling RadioShack stores and revamping its product lineup in a bid to shed its reputation as a throwback to 1980s shopping malls. Still, analysts have grown increasingly concerned that the company won’t have enough time to execute the turnaround.
Credit traders have signaled mounting concern that RadioShack is facing an imminent default.
The cost of protecting against default by the chain within six months had surged to as high as 60.5 percent upfront on Aug. 12, according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices in the privately negotiated market. That means it cost $6.05 million initially to protect $10 million of debt for six months. It was 44.5 percent as of Aug. 26, data show.
Competition from e-commerce companies and a maturing mobile-phone business are taking a toll on RadioShack, Chukumba said.
“RadioShack is suffering death by 1,000 cuts,” said Chukumba, who has a hold rating on the stock.
Healthier electronics retailers also are having a hard time, including Best Buy Co., he said. The Richfield, Minnesota-based company posted second-quarter revenue today that fell short of analysts’ estimates and predicted sales would continue to decline.
“If Best Buy’s top line is hurting, particularly in the mobile business, that portends incredibly poorly for RadioShack,” Chukumba said.