💥Bed Bath & Bagholders💥
Virgin Orbit, JNJ, Boy Scouts, Joann Stores, Morphe, SiO2 Medical Products + More.
Waaaaaaaaay back on — *checks watch* — February 12, 2023, we wrote about how Bed Bath & Beyond Inc. ($BBBY) had pulled a rabbit out of its hat to avoid what appeared to be an imminent chapter 11 bankruptcy filing:
It’s a piece worth revisiting but the essence of the rabbit was that Hudson Bay Capital Management and BBBY agreed to a structurally creative (and objectively cynical) transaction structure involving the sale of convertible preferred stock to Hudson Bay (and other investors, to a lesser degree). Hudson Bay then had the option to convert that preferred stock to common … or not. And then if/once it converted the preferred stock to common, it had the option to hold the common stock for, like, reasons 🤷♀️, i.e., maybe tout its support for the company and its belief in the management’s business plan or, like, whatever 🤷♀️ … or not. If you think our tongues are in our cheeks as we wrote that last sentence, well, pat yourselves on the back because of course these savage (but smart) motherf*ckers converted the preferred stock to common stock at the very first instance they could and, moreover, of course they then dumped that common stock into a market full of marks in, like, a nanosecond. The structure incentivized this because the conversion would always occur at a discount to the then-current stock price, all-but-assuring Hudson Bay that it would always make money. Query whether BBBY gave Hudson Bay a symbolic discount coupon as a “deal toy” of sorts.
And so BBBY, in the first instance, raised $225mm which was enough to bring the company’s credit facilities back into compliance, cure missed interest payments, and presumably pay vendors to fill shelves with bed, bath and beyond-y stuff. It also provided the company with some messaging ammo: the company remained open for business (just not in Canada)! Hudson Bay built it people, so come!!
Of course this was just a plug. The company would require much more liquidity to move beyond lender issues and actually turn around the business and give people a reason to come. And so there was another element to the deal structure: Hudson Bay also received warrants to buy $800mm of preferred stock. Interestingly, Hudson Bay was on the hook to exercise those warrants at the company’s direction — subject to a major catch. The stock needed to remain above a $1.25/share price; if the stock dipped below that level, Hudson Bay was off the hook. The overall structure — remember that critical discount — protected Hudson Bay’s downside while also recognizing the practical reality of the whole thing: the transaction structure baked in the fact that by converting preferred stock into common stock and dumping it onto a bunch of dumbf*ck muppet bagholders into the market, market forces would push BBBY’s stock price ever lower. At first the “meme stonk dumba$$es,” as we affectionately referred to them in our prior piece, may not mind because, like, reasons 🤷♀️, but over time, nobody likes to see their stock drop like a stone (more on this in a second).