Bed Bath & Beyond’s $1 Billion Stock Deal: What to Know
Retailer faces doubts about its long-term survival even after unusual financial lifeline
By Anna Mutoh, published: The Wall Street Journal, Feb 15, 2023
Bed Bath & Beyond says its goal is to operate 360 of its namesake stores, about half the number it had a year ago.
(PHOTO: JOHNNY MILANO/BLOOMBERG NEWS)
It has been a whirlwind for Bed Bath & Beyond Inc.’s meme-stock investors, marked by a credit default, store closings and a last-gasp financing deal that saved the company from chapter 11. The turbulence isn’t likely to settle soon. Bed Bath & Beyond’s shares slid 65% in the week after it announced an unusual financing deal with Hudson Bay Capital Management in early February that took bankruptcy off the table for now.
The stock fell in the wake of deal terms that dilute the ownership stake of existing investors as Hudson Bay sells shares it acquired at a discount into the market. The question now as the market digests details of the rescue package is whether the retailer can fix its struggling business with its newfound lifeline.
What are the terms of the stock deal?
Bed Bath & Beyond raised an initial $225 million from the stock offering, with an additional $800 million available in installments.
Hudson Bay received convertible preferred shares for its initial investment, while the rest, up to $800 million, will become available to Bed Bath & Beyond later, if the company meets certain conditions, including satisfying its debt obligations.
The initial $225 million will be used to repay outstanding debt under the company’s credit facility and to help rebuild inventory. Bed Bath & Beyond also issued warrants to purchase shares of convertible preferred stock and warrants to purchase common stock that are exercisable anytime at a price of $6.15. The shares were trading below $2 on Wednesday.
The deal is complicated, but it essentially buys time for Bed Bath & Beyond to figure out its next steps. The investors led by Hudson Bay, meanwhile, get shares at a discount to the market rate. The high trading volume in the company’s stock provides the liquidity needed for Hudson Bay to unload the shares for a quick profit.
What does the deal mean for individual investors?
Bed Bath & Beyond has developed a following among individual investors, who can now expect significant dilution. As Hudson Bay exercises its warrants, the 117 million shares outstanding will increase significantly. Existing shareholders could see over 80% dilution from the convertible preferred shares and warrants if they are fully exercised, according to analysts.
Had it not been for this deal, however, Bed Bath & Beyond shares could have reached a value of zero in a chapter 11 case, where shareholders rank behind the company’s debts to banks, bondholders, landlords and vendors.
Store closures have triggered more layoffs, negotiations with landlords and new efforts to mend relations with vendors.
(PHOTO: ZIYU JULIAN ZHU/XINHU/ZUMA PRESS)
Why does Bed Bath & Beyond need the money?
At its peak in 2017, Bed Bath & Beyond had 1,550 stores and $12.3 billion in sales. Since then, the home-goods retailer known for its 20% off coupons has struggled to survive.
Declining sales, a failed attempt to transform itself by replacing name-brand merchandise with private-label goods, bad relations with vendors, piled-up debt, and changes in top management have combined to push the company to the brink of a bankruptcy liquidation.
Bed Bath & Beyond borrowed from Sixth Street Partners last year to survive until the holiday shopping season, but sales didn’t rebound as expected, putting the company on a path to insolvency in 2023.
Is bankruptcy now off the table?
No, according to Jaime Katz, a stock analyst at Morningstar Inc. who covers Bed Bath & Beyond. “This buys them time to figure out how they want to remedy the current situation, but at the end of the day, it doesn’t change the fundamentals of the business,” Ms. Katz said, pointing to the company’s net loss of nearly $400 million in the fiscal third quarter.
Ms. Katz, who assigned a $0 fair value estimate to the retailer earlier this year, said she believes the company will burn through its new financing at a time when consumers aren’t spending as aggressively on home goods as they were at the start of the pandemic.
“There is not enough time with this amount of money given the magnitude of the losses for this to be remedied,” she said. It would be easier to make this business right in bankruptcy protection, Ms. Katz said, by giving the company the opportunity to exit leases with minimal penalties.
After the deal announcement, Wedbush Securities stock analyst Seth Basham lowered his target price for Bed Bath & Beyond to zero from $1, calling the deal a “last gasp” to survive before filing for bankruptcy protection. Mr. Basham said in a report published Tuesday that he estimates capital raised from this deal provides the company with just a few more quarters to turn things around.
What does Bed Bath & Beyond plan to do next?
The company said it plans to close more stores, on top of the 87 store closures announced in January, and said that its ultimate operating goal is about 360 of its namesake stores, about half the number it had a year ago. It also plans to operate roughly 120 buybuy Baby stores across the U.S. The company is shutting its chain of 50 health and beauty Harmon stores.
Bed Bath & Beyond also placed its Canadian division in bankruptcy protection under that country’s equivalent of chapter 11, saying there isn’t enough capital to restructure both the U.S. and Canadian businesses.
Store closures have triggered more layoffs, negotiations with landlords and new efforts to mend relations with vendors. The turnaround is being led by Chief Executive Sue Gove, who has been in the role since October, and interim Chief Financial Officer Holly Etlin, who came from AlixPartners LLP, a restructuring firm that has been advising the retailer. Bed Bath & Beyond announced Ms. Etlin’s appointment in early February.