Don’t pull the plug on RadioShack Corp. just yet.
Standard General LP, the hedge fund that’s orchestrating a rescue for American Apparel Inc., is in talks with RadioShack about ways to raise cash that would allow the electronics retailer to stave off a bankruptcy filing, according to two people with knowledge of the matter. The company’s shares and bonds rose yesterday.
Fresh cash from a more diverse group of investors may make it easier for Fort Worth, Texas-based RadioShack to implement its turnaround plan, which includes closing stores, to mitigate nine straight quarters of losses. Without a capital infusion, the seller of phones and batteries will probably face a cash crunch next year, according to Moody’s Investors Service.
“As tough a battle as it’s going be to turn the business around, I won’t completely write them off yet,” Will Frohnhoefer, a special-situations equity analyst for BTIG LLC in New York, said in a telephone interview. “The new capital could get them through the rough patch.”
Standard General, based in New York, owned almost 10 percent of RadioShack’s shares as of yesterday, one of the people said. That’s up from 7 percent as of June 30, according to data compiled by Bloomberg.
RadioShack’s $324.8 million of 6.75 percent notes due May 2019 rose 4 cents yesterday to 44 cents on the dollar, according to Trace, the bond-pricing system of the Financial Industry Regulatory Authority. Those bonds traded as low as 35 cents on June 20.
Shares climbed 19.4 percent to 86 cents yesterday on the New York Stock Exchange. That’s the highest close since July 9, Bloomberg data show.
Standard General is also seeking a way 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. That may allow the retailer to close a large number of underperforming stores, helping stem cash losses.
A refinancing of the loan “will buy the retailer more operating flexibility,” Noel Hebert, an analyst at Bloomberg Intelligence, wrote in a report yesterday. “Both Standard General and fellow shareholder BlueCrest Capital say RadioShack should close as many as 1,100 stores, a plan that was rejected by lenders given that closures would reduce its available collateral.”
Merianne Roth, a spokeswoman for RadioShack, declined to comment, as did Salus’s Emily Serafin and Standard General’s David Glazek.
RadioShack lost $98.3 million in the quarter ended May 3, wider than the $43.3 million deficit in the year-ago period, Bloomberg data show. The retailer is in danger of running out of cash in 2015, according to a July 29 Moody’s report. Moody’s rates the company Caa2 and Standard & Poor’s gives it a CCC grade.
Even a fresh infusion of cash and the ability to close more locations don’t automatically point to a turnaround, according to Scott Tilghman, an analyst at B. Riley & Co. in Boston.
Store closings “are not the silver bullet,” said Tilghman, who recommends selling the shares. “There is cost associated with closing stores; the challenge for them is being able to do that while at the same time righting the current business.”
Standard General, which was founded in 2007, 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.
RadioShack’s revenue fell to $3.43 billion in fiscal 2013 from $3.83 billion the year earlier, Bloomberg data show. The retailer would need to increase its revenue by a third to get back to break-even, according to Tilghman.
Standard General is “trying to salvage their investment,” Anthony Chukumba, senior research analyst at BB&T Capital Markets in New York, said in a telephone call. “Whether it’s going to be successful or not is another question.”