What Bed Bath & Beyond's Hail Mary to Avert Bankruptcy Means for Its Stock

People walk in a New York City Bed Bath and Beyond location on Jan. 11.

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Bed Bath & Beyond (BBBY), the ailing retailer that missed a $25 million interest payment on its debt this month, unveiled a plan to skirt bankruptcy by raising as much as $1 billion through the sale of convertible shares and warrants. Its stock price plunged.

The company will sell more than 23,000 shares of its Series A convertible preferred stock to raise $225 million upfront. It will also sell warrants that will allow investors to purchase more than 84,000 shares of convertible preferred stock and 95 million shares of common stock in the future to raise $800 million.

With the sale and a $100 million credit line from one of its lenders, the retailer hopes to repay some of its debt, including the payment due to JPMorgan on Feb. 1. If it doesn't catch up by March 3, it would be liable to pay the entire $1.03 billion debt immediately. Money from the sale of warrants will go toward turning around its operations.

What Does This Mean For Investors?

Bed Bath & Beyond is a meme stock, meaning it's heavily shorted, and its share price once soared due to coordinated buying efforts by retail investors. Plenty of money is riding on the share price to crash, and the stock lost almost half its value on Tuesday even after the company spelled out its attempt to avoid insolvency.

The warrants issued by BBBY that convert to preferred stock may appeal to some investors since they can offer guaranteed returns in the form of dividends. People who are shorting the stock could hedge their bets by purchasing the warrants. Once converted it could be a win-win: They’ll make money on both accounts, even if the share price is in a downward spiral.

That's not to say it's a strategy lacking risk. Because the new securities would rank below the company’s debt, if the company ends up in bankruptcy or liquidation, preferred stock will only be honored after all of its debt is repaid.

This sale will also "significantly" dilute the stake held by the company’s existing shareholders. Since the number of shares available in the market will rise, the company expects its share price to fall.

Some analysts remain skeptical that the retailer can raise the cash it needs to repay debt. At Wedbush Securities, analyst Seth Basham cut his target price to zero from $1.

“In the event the transactions are successful, BBBY common shares could rise as they are trading like options on the company’s survival, but the ultimate value would be undermined by this highly dilutive offering of preferred stock that would have priority over the common shares,” Basham wrote.

The retail backdrop is grim: Bed Bath & Beyond doesn't expect comparable-store sales to pick up until later this year, after dropping as much as 40% in the first quarter.

Article Sources
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  1. Bed, Bath and Beyond. "Bed Bath & Beyond Inc. Announces Pricing of Offering of Series A Convertible Preferred Stock and Warrants."

  2. U.S. Securities and Exchange Commission. "Bed, Bath and Beyond- Prospectus Supplement."

  3. Yahoo Finance. "Bed Bath & Beyond Inc. (BBBY)."

  4. U.S. Securities and Exchange Commission. "Bed, Bath and Beyond Exhibit 99.2"

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