As mentioned in my last RadioShack-related post, I’ve been re-evaluating my position ever since they first announced the refinancing deal last month. And, with 70% of my thesis proven correct, I’ve decided to sell my position for now. Given RadioShack’s current situation, the remaining 30% of my thesis doesn’t offer enough upside at this point in time. Here’s why:
We all know that RadioShack is burning through cash at an expedited pace. Nobody knew exactly how fast, though, until they released their Q2 earnings report a couple weeks ago. In Q2, their cash-on-hand decreased from $61 million to $30.5 million and their credit-line decreased from $362 million to $152 million. If you do the math, you’ll see that they burned through $240.5 million in one quarter, leaving them with only $182.5 million for Q3. That means that Q3 would have to be about 25% better than Q2 in order for the company to stay solvent. With Q2’s burn-rate, though, they’d be lucky to survive through the end of Q3 in September.
To survive solely off of Standard General’s refinancing deal, RadioShack needed to act fast in Q3, finishing the deal and closing 1,100 stores. Fast-forward to September 22, eight days before the end of Q3. RadioShack sends out an SEC filing stating that “The Company and certain of its largest creditors have had discussions with a major vendor concerning potential modifications to the commercial relationship that could be beneficial to a financial restructuring of the Company. These discussions did not result in a change to the commercial relationship at this time but are continuing.”
Emphasizing what I said earlier, RadioShack needed to act fast. If they were acting fast, RadioShack would’ve put out a press release stating that they signed the refinancing deal long ago and already began closing under-performing stores. Instead, they send out an SEC filing announcing that they’re still playing around with other options.
At this point in time, refinancing is no longer enough. Refinancing only gives them the ability to cut costs through store closures, but it doesn’t give them any new cash. And they absolutely need cash NOW. With their low credit rating, RadioShack won’t be able to open-up new lines-of-credit without offering something huge in return. All they can offer at this point, though, is equity. And in their desperation for cash, they’re likely going to have to give up a tremendous amount of equity to get that cash.
So just how much equity would they have to give-up at this point? Well, according to their most recent 10-Q financial statement, they’re currently authorized to issue up to 650,000,000 common shares. As of right now, they’re sitting at around 146,000,000 shares on the open market, so that gives them the ability to issue north of 504,000,000 additional shares without asking current shareholders for approval. And then there’s also 1,000,000 preferred shares and 300,000 Series A shares available to issue.
To make a long story short, RadioShack only has two options now: mega-dilution or bankruptcy. With those being the only two viable options (both of which decrease shareholder value), maintaining my RadioShack investment provides no benefits at this time. So I plan to wait on the sidelines for either bankruptcy or an SPO. An SPO would likely provide the open market with largely discounted shares, making the risk-reward potential dramatically better for the thrill-seeking investor. And being that kind of investor, I wouldn’t hesitate buying back in at an SPO price. Because with RadioShack Labs, Fix It Here, and Defense Mobile rolling out, there’s a lot of potential upside if RadioShack has the time to implement Joe Magnacca’s turnaround plan.
