Several respected financial outlets (Bloomberg, Barron's and Reuters) reported that RadioShack's (NYSE:RSH) second largest shareholder, Standard General LP, is in talks with other investors regarding a financial rescue package for RadioShack, which would prevent the company's bankruptcy. The options discussed so far are reportedly issuance of debt or equity. The hedge fund also intends to refinance RadioShack's $250M second-lien term loan held by Salus Capital Partners LLC and Cerberus Capital Management LP. Among other things, this would lift the strict covenants that prevent RadioShack from going ahead with its strategic plan to close more than half of its stores, remodel the rest and attempt a turnaround. In a separate action, RadioShack bondholders are in talks with financial adviser Houlihan Lokey to review their options.
In a very interesting connection, Standard General has also been helping American Apparel (APP) in its turnaround. As part of that deal, RadioShack's CEO Joe Magnacca was appointed to American Apparel's board, establishing a tie between the two struggling retailers. This opens up several very creative opportunities how the investor can optimize capital usage and retail space. The companies can pick the best retail locations from both companies and close the rest of the stores. The companies can also attempt to cross-sell some of their products in the other retailer's locations or remodel some RadioShack locations to American Apparel. The Apple's iPhone 6 launch is just around the corner, as is the back-to-school and winter holidays' strong retail season. The companies could also sell some properties and use RadioShack's unneeded leasing agreements in order to save capital and make the investment even more capital effective.
In my original long RadioShack thesis from three weeks ago, I mentioned that RadioShack became so cheap that despite the very low probability of avoiding the bankruptcy, the stock offered an attractive reward/risk investment, if long-dated out-of-the-money call options are used instead of buying the stock outright, or if the long stock position is protected with out-of-the-money puts. The thesis has worked extremely well so far as the stock gained roughly 60% in three weeks as a short squeeze was triggered by this positive financial rescue speculation. If call options were used as I advised, the gains are much larger than 60%. The recent developments around the financial rescue talks increases RadioShack's odds of averting the bankruptcy even further and make me even more bullish. I am not selling any of my long positions yet. In fact, I reiterate my long thesis and confirm my target price of $13 to $33 per share. I added some more today but also sold some out-of-the-money covered calls to protect at least some of the invested money if the current speculation evaporates. Moreover, even if RadioShack avoids bankruptcy, the turnaround will be extremely hard and the financial rescue may involve share dilution, which could hurt existing shareholders. RadioShack remains a very speculative investment.
Disclosure: The author is long RSH. I have owned a long RSH position for several months and added slightly today for a total potential loss of ~$1, 000.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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