As previously mentioned, the big cause of concern related to ValueVision (VVTV) was its upcoming redemption of GE Capital’s preferred stock which would have wiped out most, if not all, of VVTV’s cash and put it close to bankruptcy. Instead, they have been able to restructure the preferred stock to the following conditions:
- An upfront cash payment of $3.4 million.
- 4.9 million shares of a new series of non-convertible redeemable. preferred stock with a redemption amount of $40.9 million and a 12% dividend rate, payable in 2013 and 2014.
- Repayment of the preferred stock is scheduled for 30% in 2013 and the remainder in 2014 with accelerated payments possible only if ShopNBC generates excess cash above agreed upon thresholds.
- Warrants to purchase 6 million shares of the company’s common stock at $0.75 per share.
The company also announced its board of directors authorized a common stock buyback of up to $1.5 million over the next 12 months. The timing and amount of any repurchases will be determined by management based on an evaluation of market conditions and other factors. The buyback will be funded through existing cash balances.
What Does This Mean?
The restructure allows VVTV to extend its obligations by 5 years which gives it breathing room and squashes fears of bankruptcy as it continues to work on a turnaround. However, the new deal obviously benefits GE Capital. How? The original aggregate redemption cost to GE for all the preferred stock is $44,264,000. This number has not changed.
$3.4 mil + (0.3 x 40.9 mil) + (0.7 x 40.9mil) = $44.3 mil
VVTV now has to pay a 12% dividend and dilute shareholders by offering an additional 6 million warrants.
The other news was the stock buyback plan. If $1.5 million is used to buy back stock at an average price of $0.25, the company would end up buying back 6 million shares (1.5 mil/0.25=6mil). Do you see the “coincidence”? Buy back 6 million shares and then dilute with 6 million warrants.
The stock buyback therefore seems like an effort to create an illusion of enhancing shareholder value, but is in fact a strategy of slyly countering the dilution. It is a shame that the preferred isn’t bought back.
If my theory is correct, it confirms what I think about management - not much. I understand that John Buck is trying to direct the company but with such a high and sudden turnover in executives and board members of late, it really questions what he is trying to do.
Letting the company fall to such valuations without a single buyback until now is also questionable. I never got the impression that the board had their interests aligned with shareholders'.
I could be completely wrong with this theory or it may not matter as people simply gloss over the details and focus on the stock price and how it is related to the warrant price of $0.75.
Disclosure: I own VVTV at the time of writing.