Bed Bath & Beyond’s 30,000 Workers Were Key Factor in Last-Minute Deal

(Bloomberg) — Bed Bath & Beyond Inc. was just days away from filing a bankruptcy petition before a game-changing conference call on Friday with its increasingly impatient lenders.

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Wall Street bankers were growing frustrated and panicked, threatening to push the company into Chapter 11 to stem losses after it defaulted on a loan managed by JPMorgan Chase & Co. weeks earlier. For some, they needed to act quickly: the banks still stood to recover most of their investment if the home goods company liquidated its assets.

But that prospect was fading by the hour. The company was burning cash fast while inventory was dwindling and customers were vanishing.

Yet against all odds, the firm’s advisers managed to secure two more days to negotiate a Hail Mary equity raise, according to people familiar with the discussions, as they played on bankers’ concern that they would be blamed for thousands of lost jobs. Capitalizing on demand for the meme stock’s shares, Bed Bath’s advisers orchestrated a shock $1 billion deal Monday evening that staved off imminent collapse.

The threat of big job losses for its 30,000 employees raised the stakes, according to people on the Feb. 3 conference call, who declined to be named. Kirkland & Ellis attorney Joshua Sussberg reminded lenders of the human cost should the firm crater before all capital-raising options were exhausted, the people said, reprising his tactic during bankruptcy negotiations on behalf of Toys ‘R’ Us and JC Penney Inc.

Sussberg warned that if he ended up before a bankruptcy judge on Monday, the court would hear about the equity deal that could have been — and the banks that didn’t allow it, the people said.

The plan worked. A cash infusion will come through the sale, run by investment bank B. Riley Securities Inc., of convertible preferred shares and warrants via anchor investor Hudson Bay Capital Management, a New York-based multi-strategy hedge fund, Bloomberg has reported. It gives the company a last-gasp lifeline — in a deal Wall Street analysts say appears designed to tap into the staying power of meme-stock investors even in this era of Federal Reserve hawkishness.

It’s a tall order. Shares collapsed 49% on Tuesday — and continued to fall Wednesday — as several analysts said the equity offering simply delayed the inevitable death spiral. Early indications on retail demand are far from encouraging.

Representatives for B. Riley, Kirkland, Hudson Bay Capital and JPMorgan did not offer comment for this story. In a statement, a Bed Bath & Beyond spokeswoman said the transaction “will provide runway to execute our turnaround plan as we position our company to serve our customers, where they are, well into the future.”

Underscoring the risky nature of the transaction is its $1 billion target size compared to Bed Bath & Beyond’s market capitalization, which on Wednesday had fallen to around $300 million. Equity markets recognized that the offering, by creating more equity shares, would dilute the value of existing stock.

Bed Bath & Beyond itself warned in a securities filing Monday that it might have to file for bankruptcy protection even after the equity deal is completed. “Trading in our securities is highly speculative,” it said.

Meanwhile most institutional investors have steered far clear of the retailer’s securities in recent months, notes Cristina Fernández, a Telsey Advisory Group analyst. “It’s too high risk for them.”

Still, the deal creates an opportunity for Hudson Bay to acquire common shares at a discount and then offload them to other investors, including the retail cohort, according to people familiar with the strategy.

Meme Mania

Bed Bath & Beyond first attracted the attention of the Reddit crowd in the stay-at-home pandemic era when the boom in zero-commission trading turbocharged speculative bets on ailing companies. The stock’s popularity across message boards was cemented last year when activist Ryan Cohen took a stake.

Shares surged more than 300% over three weeks in August last year as day traders speculated on Cohen’s involvement — despite a flurry of ratings downgrades at that time and effective shuttering of capital markets for its securities. The firm’s share price has traded well above $2 for much of this year even as it publicly emphasized its distress and the risk of a total wipeout of its shareholder value. Traditionally, the equity of any company citing bankruptcy risk would trade close to zero.

However recent indications suggest even the Reddit crowd isn’t buying as much as it once was. Individual investors have plowed just $34 million into the stock over the past two weeks, according to Vanda Research, a far cry from the $73 million they pushed into the company in a single day in August.

“If I was running a meme stock I would be an idiot not to try to capitalize on the madness of crowds,” said Matthew Tuttle of Tuttle Capital Management, an investment advisory firm.

For the firm’s new interim Chief Financial Officer Holly Etlin, a restructuring veteran, all may not be lost. Proceeds from the deal should help with inventory orders and some overdue debt payments. That should give it immediate financial breathing room and the opportunity to convince skittish suppliers to send it more merchandise to fill sparse store shelves.

But to survive for longer than a few more months, the retailer has to make progress on the operational improvements, such as offering more national brands, which executives have been working on for more than six months.

In August the company raised around $500 million from its banks and a new lender, Sixth Street Partners, which extended another $100 million as part of this week’s deal. A representative for Sixth Street declined to comment.

Yet the retailer still struggled to stock its shelves because suppliers remained wary of not getting paid. Even after the latest equity deal, some suppliers say they are skeptical about the firm’s ability to get back on track.

Meanwhile it had a negative free cash flow of $403 million in its most recent quarter and had $153 million of cash on hand, Wedbush analyst Seth Basham noted in a research report on Tuesday. He expects negative free cash flow of around $170 million in the current quarter.

Cutting costs could help stem the losses and Bed Bath & Beyond said on Tuesday that it was slashing its flagship store count by about half to around 360, without providing a timeframe for the closures. But even that is unlikely to be enough to revitalize the troubled retailer.

“We see a low probability that the company achieves its 2023 turnaround plan,” Basham wrote in a report on Wednesday. “We ascribe little-to-no value to the company’s equity on a probability-weighted basis.”

–With assistance from Hannah Levitt, Reshmi Basu, Bailey Lipschultz, Jeremy Hill and Crystal Tse.