Bed Bath & Beyond Got Its Deal Done

We talked yesterday about Bed Bath & Beyond Inc.’s unusual rescue financing deal. Bed Bath was, apparently, a whisker away from filing for a messy bankruptcy, and was instead saved by a huge equity investment led by Hudson Bay Capital Management. The investors paid Bed Bath $225 million for some convertible preferred stock and warrants, and promised to put up another $800 million for more convertible preferred stock if things go well.

I suggested yesterday that the best way to understand this deal is not that Hudson Bay and friends are long-term equity investors in Bed Bath, but that they are planning to buy stock from Bed Bath at a substantial discount to the market price, and then turn around and sell it into the market. The investors paid Bed Bath about $225 million for $237 million face amount of convertible preferred stock (that is, they got a 5% discount): Today, that $237 million of convertible preferred stock is convertible into common stock at a conversion price of $2.3727. That means that the investors could convert one $10,000 preferred share — that they bought for $9,500 — into 4,214.6 shares of common stock. The stock closed yesterday at $3.01; it was trading at about $2.58 at noon today. The investors could sell their 4,214.6 shares today for about $10,873, for a $1,373 profit on their $9,500 investment, a 14% return in, you know, a day.