FTD Companies: Chapter 11 Almost Certainly Will Zero Out Shareholders

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About: FTD Companies, Inc. (FTD), Includes: FLWS, QRTEA, QRTEB
by: Vince Martin
Summary

FTD filed for Chapter 11 bankruptcy on Monday, leading the stock to plunge some 75%.

Asset sales are bringing in much-needed cash, and could, on paper, suggest some modest recovery for the equity.

But in practice, recovery seems likely to be zero, and sales of the remaining owned assets could fall through.

FTD will continue on in pieces, but shareholders are likely to be zeroed out.

The end is at hand for FTD Companies (FTD), at least as a publicly traded company. FTD filed for Chapter 11 bankruptcy on Monday, leading FTD shares to drop some 75% to a close of $0.19.

The news isn't entirely surprising. After taking an ill-advised flyer last year (as I've written before, one of my worst investing mistakes ever), I argued in April that FTD was likely headed for zero this year. Asset sales announced in conjunction with the filing might raise some hope that such an outcome can be avoided, and that equity holders could salvage something out of the stock. But looking closer, that's highly unlikely to be the case. FTD stock should be heading to zero.

The Ironies of FTD

There are two ironies inherent in the FTD bankruptcy. The first is that the imminent default led the company to sell off assets - which was part of the bull case I (and others) laid out last year. The company had announced at the time that it was trying to sell its Personal Creations business, and I posited that in a worst-case scenario the company could sell its UK-based Interflora business as well. Combined, I wrote in November, the two sales could come close to erasing the company's net debt, which then was a bit under $200 million.

That proved to be disastrously optimistic. FTD is selling the International business (to the Wonderful Co., a private company known for its pistachios, but one that also owns Teleflora) for $59.5 million - less than 5x 2018 operating income, and likely less than 4x EBITDA. That's about half what I thought the company might be able to get, even with the obvious issues posed by Brexit and weakness in 2018 profits. (I had estimated something like 6x $20 million in EBITDA.)

FTD in addition has executed a non-binding letter of intent to sell Personal Creations for an unspecified amount. A similar agreement has been made regarding Shari's Berries. And the ProFlowers business is being restructured, with the website and brand being maintained while fulfillment and distribution are being shifted to the FTD network.

Those are the types of moves that, on paper, could have salvaged the business before now. It's not clear whether FTD didn't, or couldn't, make them before its negotiating position was so severely weakened.

The second irony is that FTD is breaking itself up after essentially destroying its stock by building itself up in the first place. It was the $430 million acquisition in 2014 of Provide Commerce from Liberty Interactive, now Qurate Retail (QRTEA) (QRTEB) that created most of the debt on FTD's balance sheet, even though much of the deal was funded by stock. (Qurate owned 36% of the company as of the end of 2018.) Management from rival 1-800-Flowers.com (FLWS) told me last year that they looked at the deal as well, and instead chose to acquire fruit seller Harry & David. As I've written before, it's hard to imagine a more fateful pair of decisions - or a more incredible stock chart among two peers:

Chart Data by YCharts

chart from July 30, 2014, the day FTD announced its acquisition of Provide

FTDQ To Zero

Of course, FTD didn't just sell off its ancillary businesses. It sold its core operations as well, for some $95 million to P-E firm Nexus Capital. Combined with the $59.5 million payment for Interflora, that's $154.5 million coming to the company - which closed 2018 with $191.8 million in net debt. (FTD has not yet released Q1 numbers yet, instead filing an NT 10-Q with the SEC.)

And there's still cash coming in from Shari's Berries and Personal Creations, assuming those sales go through. Those two segments (Shari's Berries is the company's Gourmet Foods category) combined generated $260 million in revenue in 2018, per the 10-K. Personal Creations actually grew revenue 9%, continuing a steady trend. That growth was the key reason I thought the company could get $50-$60 million for that business (which suggested a revenue multiple still below 0.5x).

The prices for the sales of those two businesses haven't been disclosed. But anything over $37.3 million - less than 0.15x sales - would in theory leave some residual value for equity holders. Beyond that, a large shareholder, Nantahala Capital Management, filed a 13D on May 10, disclosing a 14% stake. There would seem to be some modest hope on paper that recovery value will exceed zero - and that Nantahala, at least, would push to return that value to shareholders, itself included.

That seems highly unlikely, however. FTD did close 2018 with net debt of $192 million - but the figure may well be higher at the moment. As Bloomberg pointed out, the company disclosed in its bankruptcy filing [pdf] that it owed some $224 million at the moment - leaving an incremental ~$70 million beyond the capital raise. In addition, the Provide unit "significantly missed their Mother's Day 2019 forecasts", which follows disclosure of a disappointing Valentine Day's on the Q4 conference call. Suppliers also were demanding quicker repayment; FTD's year-end cash of $16.2 million likely was depleted. Penalties related to the default, bankruptcy advisory costs, and other expenses likely will run into the millions as well.

Indeed, the company itself said in Monday's news release announcing the filing that "based on the values for the Company's businesses contemplated by the potential asset sales referred to above, the Company expects that existing Company shareholders will receive no recovery at the end of the court-supervised restructuring process." Those "potential asset sales referred to" should include Personal Creations and Shari's Berries - meaning that whatever the non-binding offers are, FTD itself doesn't see any residual equity value.

Qurate, formerly the company's largest shareholder, certainly seems to believe that is the case. That company disclosed in a filing on Monday that, on Friday, it had sold its 36% stake in three separate transactions - for a total price of $3.00. (Each sale was made for one dollar in "aggregate".). According to the filing, Qurate did so to harvest tax losses. Were there any chance of equity recovery, Qurate would seem best-positioned to know - and its move suggests that company sees the chance as zero.

Is there a chance? Perhaps. Nantahala and the three organizations that bought Qurate's stake (whose names are in the filing but appear to have no public presence) own 50% of the equity, and no doubt will be pushing for a seat at the proverbial table. But it seems highly unlikely that there's much, if anything, they can do. There simply doesn't appear to be enough cash coming from Shari's Berries and Personal Creations to pay the ~$70 million in remaining debts plus the various fees involved in the bankruptcy. And the equity will be junior to all of those claimants.

It's a disappointing end, particularly because so many of those wounds here look self-inflicted. The Provide deal obviously has become a disaster, and the quick and curious reversal of a multi-year turnaround plan released in early 2018 didn't help. (In retrospect, the FTD board simply may have realized that they wouldn't have the funds to see that plan through.) But that doesn't change the facts at the moment: FTD appears to be out of room, and out of time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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