(Bloomberg) — The financial lifeline that pulled Bed Bath & Beyond Inc. from the brink of bankruptcy last month is already at risk because of the retailer’s tumbling stock price.
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The equity financing, led by hedge fund Hudson Bay Capital, provided the company with $225 million upfront, with the promise of another $800 million over the coming eight months. Bed Bath & Beyond Chief Executive Officer Sue Gove on Feb. 7 trumpeted it as a “transformative transaction” that would give the company time to mount a turnaround.
Yet the additional cash has strings attached. Among them: Future injections are contingent on Bed Bath & Beyond maintaining a weighted average stock price of at least $1.25 or $1.50, depending on the timing, according to a regulatory filing. The deal terms allow Hudson Bay to waive those conditions if it wants.
But keeping the stock price above those thresholds may not be easy. It has already tumbled over 70% since Feb. 6 and closed as low as $1.41 on Tuesday. The shares ended Thursday at $1.56.
A representative for Hudson Bay declined to comment. A representative for Bed Bath & Beyond did not respond to requests for comment.
The pressure on the stock has stemmed in part from the rescue itself. The first leg gave Hudson Bay the right to convert its initial investment into common shares at a discount to the trading price, extending it the option to earn a quick profit by selling the shares.
Investors were quick to recognize the risk that the financing would flood the market with stock, diminishing the value of the outstanding shares. As a result, the price tumbled steadily after the deal was announced.
February’s deal wasn’t the first time Bed Bath & Beyond raised rescue financing in order to avert bankruptcy.
In August, the company pledged its assets to credit fund Sixth Street Partners in order to obtain a $375 million loan. The retailer had a net loss of $393 million in the three months ended in late November. By January, that money was gone, and Bed Bath & Beyond had entered into bankruptcy talks.
This time around, Sixth Street provided a fresh $100 million in connection with Hudson Bay’s equity deal. But given the scale of its quarterly losses, Bed Bath & Beyond’s future may be dependent on the promise of the $800 million to come — potentially putting the company’s fate at the mercy of its stock price.
–With assistance from Bailey Lipschultz and Jeannette Neumann.
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