La Polar Stock Offering Approved, Shares Surge in Santiago

Empresas La Polar SA shareholders approved a proposal to sell new stock as the Chilean department-store operator seeks to avert a second bankruptcy in 12 years.

In a meeting in Santiago today, stockholders gave their consent for the sale of 250 million shares to be priced at a subsequent meeting. The transaction may raise about $200 million, which will help make the company viable, Chairman Cesar Barros told reporters after the meeting.

“The purpose of the $200 million is to leave the company with enough working capital to face its current problems and continue operations so La Polar doesn’t lose market share,” Barros said. “The company can continue operating for a number of months before it receives the capital injection.”

La Polar climbed as much as 23 percent before today’s vote. The Santiago exchange suspended trading at 10:20 a.m. New York time when the stock was at 540 pesos. Shares had tumbled 80 percent in less than two weeks after the company announced additional loan-loss provisions from irregular consumer-lending practices. The share sale may provide a way for an investor to buy a controlling stake in the company.

“The new share sale will give La Polar more options to solve its problems, but it won’t mean the end of all of them,” said German Guerrero, who helps manage about $1 billion, including La Polar securities, as director of MBI Inversiones in Santiago. “It could open the door for a partner to acquire control or for current holders to bolster the company.”

Bond Covenants

La Polar will meet with bondholders on June 29 to discuss waiving covenants that would accelerate prepayments. Another shareholder meeting is scheduled for July 8 to vote for a new board. The price of the new shares won’t be discussed at that meeting as the company is still waiting for information from an audit being done by Deloitte Touche Tohmatsu, Barros said.

Before today, La Polar had lost $1 billion in market value since unveiling on June 9 credit irregularities that triggered regulatory and criminal investigations.

La Polar said executives restructured 475 billion pesos ($1 billion) of overdue credit without getting the consent of the more than 400,000 customers involved or informing the board. Responding to a regulatory request, La Polar said June 17 that it faces additional provisions of 420 billion pesos, compared with an initial 200 billion-peso forecast.

Including previously recorded charges, the company said it may have to set aside a total of 538 billion pesos. That’s more than 10 times last year’s earnings before interest, taxes, depreciation, and amortization, according to Bloomberg data.

‘Enormous Losses’

“Minority shareholders essentially are interested in recouping their enormous losses caused by La Polar’s decline in the stock exchange,” Barbara Salinas, a lawyer who said she filed suits for fraud in a Santiago court on behalf of about 70 shareholders, told reporters today. “The company’s new leadership should have called for a new meeting to address the most important topic: how to save this company.”

The shares closed yesterday at 467.26 pesos in Santiago trading for a market value of 116 billion pesos compared with 581 billion pesos on June 8. Shares will resume trading tomorrow, according to a statement posted on the website of the Santiago exchange.

The yield on La Polar’s 2016 inflation-index bond fell yesterday to 30 percent from 37.6 percent on June 20, according to data from the Santiago stock exchange. Before the irregularities were announced, the bond traded at 3.87 percent.

‘Risk of Bankruptcy’

“There is a risk of bankruptcy,” Raul Montero, a partner at law firm Alessandri & Cia, said in an e-mailed response.

La Polar declared bankruptcy in 1999 before the retailer was acquired by private equity firm Southern Cross Group. Southern Cross listed the company’s shares in 2003 and sold its remaining stake in 2006. Today La Polar has no clear controlling shareholder as all of its shares trade freely.

Heriberto Urzua, who replaced Pablo Alcalde as chairman last week after the irregularities were unveiled, stepped down from the position, he said in a June 20 e-mailed statement.

Urzua was replaced by Barros, who as head of Chile’s salmon exporters association led negotiations to restructure farmers’ bank debt after a virus outbreak decimated fish stocks.

‘Nobody is Innocent’

“They robbed people of their money,” Luis Pareto, a former lower-house member of congress who said he holds 6,000 La Polar shares, told reporters today. “Nobody is innocent - not the board members, not the ministers, not the regulators.”

La Polar operates 43 stores in Chile and opened its first store in Colombia this year. The company planned to invest $250 million between 2012 and 2015 to open 10 stores in Colombia and eight in Chile, Alcalde said May 3. The Colombian expansion plan will be trimmed, Barros said today.

Negotiations to restructure bank debt will be “crucial” to the company’s survival, he said.

“La Polar is ill, but its survival is in the best interest,” Barros said.

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