I've been waiting for an appealing topic to discuss, and of course, John Oliver and RadioShack ("RSH") presented the perfect opportunity. I love John Oliver, as I do almost everyone who comes from the Jon Stewart camp. When RadioShack finally filed for Chapter 11 protection, John Oliver did this bit to remind us all of the once venerable company's history:
Like Mr. Oliver and most others who live in the U.S., I don't find it surprising that RadioShack filed for bankruptcy. What I do find surprising, however, is that it took so long. I don't mean to be glib with the title of this post, but really, how did this company stay afloat after all these years of underperformance? And is there something to be emulated by the survival of a concept that many deemed obsolete so long ago?
Just a quick recap from WSJ: RadioShack filed for bankruptcy on February 5th. Senior lender Standard General will acquire between 1500-2400 stores and may strike a deal with Sprint to allow the telecom company to operate up to 1750 of them. RSH owns about 4000 stores in the US , and its domestic and international franchise stores aren't part of the restructuring.
RSH didn't go down without a fight, however. Leading up to the filing, the company quarreled with one of its distressed investors, Salus Capital (an investment firm owned by Harbinger). Salus eventually forked over the $250MM for the loan that it had promised to RSH, which came with a covenant requiring Salus' approval in case RSH wanted to close more than 200 stores a year.For more on this altercation, go here to the Bloomberg story.
Salus was obviously one of the last-resort lenders for RSH. Bloomberg contends:
"As of the end of last year, the loan accounted for almost one-third of all of Salus’s investments.For Salus and its president, Andy Moser, the deal was to be by far the biggest in the firm’s short history. It’d move the lender beyond its small niche -- handing out loans of about $25 million to financially-troubled companies -- and put a high-profile deal in its portfolio that would get the attention of Wall Street bankers."
The straw on the camel's back was an imminent violation of a liquidity test required to turn Standard General's investment into equity. In January, RSH 6.75% 2019 bonds were trading in the single digits.
"RadioShack received a rescue financing package from Standard General in October that converted the company's $535 million revolver into a $275 million term loan, and included a $120 million letter of credit, and $140 million of revolving loans.
The $120 million investment provided by Standard General and Litespeed Management is intended to be converted into equity upon satisfaction of certain conditions – which included the company having at least $100 million of available cash and borrowing capacity as of Jan. 15." LCD.
RSH tried to meet this cash test by closing 1,100 stores. Salus refused, since the stores' profits were part of Salus' collateral. For more on RSH's efforts to operationally restructure, check out FTI's first day motions testimony on Pacer.
I guess we can conduct some thought exercises here as to what would have been the least messy way for RSH to restructure. It would have been best if the company was able to shut doors of the 1,100 stores without Salus' consent. That way, the company could shrink itself to a manageable size. Also, RSH wouldn't have had to invest in giving the underperforming stores a face-lift, which proved to be a pernicious strategy.
This obviously wasn't an option. And without this covenant, RSH may not have gotten any financing at all. In my opinion, the best thing to do would have been to do an out of court restructuring instead of taking Salus' money. It bought more time, but it also removed the option of the Company being able to carry out its operational restructuring plans under its own terms. I'd love to hear more opinions about how RSH could have prevented this ignominious end.
Okay, so back to how this enterprise lasted so long. Here's an enlightening article detailing the history of RadioShack on Bloomberg and it appears that until the mid 2000's, the company was very good at doing what all start-ups are advised to do: pivot!
RSH started out as two companies: Tandy, a supplier of leather shoe parts and RadioShack, a retail store and mail-order operation that served ham radio needs of ship officers. Tandy acquired RadioShack in 1963 and espoused the strategy of appealing to hobbyists. Each store was staffed with knowledgeable employees and small add-on items that catered to tinkerers. This strategy served the company well for many years and helped established a repeat customer base. And yest, they sold a lot of batteries.
In the 70's, RSH shifted its focus to CB radios, which at one point made up almost 30% of sales. When the radio boom ended, the company pivoted once again, taking a big risk by selling the first mass-market personal computer TRS-80. This strategy also proved to be successful, and RSH spent the next decade manufacturing and selling its own computers. By the 1990's, it became difficult for the retailer to compete with big manufacturers and in 1993, RSH stopped producing computers. Its management team was looking for a new anchor and found it in cellphones.
The CEO at the time began making deals with cellphone carriers that gave RadioShack a cut of the initial device AND the monthly payments. The triumphant rise of the company's cellphone business paved the way for the business to expand into new types of retail boxes, including Computer City.
By the mid 2000's, RSH was on a downward path. The cellphone business faded as competition rose and carrier branded stores became ubiquitous. The e-commerce business suffered also, partly because the executives did not want to divert attention from the stores.
And here was the problem: when the cellphone business began dying, instead of pivoting and finding another anchor, RSH continued to fight to stay relevant in the mobile business. Many of the products, such as answering machines, became irrelevant, and employees turned into obtrusive sales people instead of quirky techies. Perhaps it would have been better if the Company had reassessed its opportunities and tried to serve another niche of under-served consumers instead of following the mobile train to its demise.