Taking a Bath: Will Bed Bath & Beyond Drown in the GameStop Surge?
I have already written two blog posts on the GameStop Saga: “Rupture Rapture: Should the GameStop?” on February 2, 2021, and “Inciting to Rupture: Keith Gill and the GameStop Surge” on February 9, 2021. There are a number of other companies whose shares have seen buying surges akin to what happened to GameStop in January 2021: AMC Entertainment; Nokia; Koss, Corp.; and up to nine others (based upon the January 28 trading halt on Robinhood for the stocks of 13 companies). One of those affected was Bed Bath & Beyond (“BBB”), a retail chain selling kitchen, bedroom, bathroom, and related items. BBB had fallen on hard times since going public in 1992 but underwent a major management change in 2019 brought about by the intervention of three activist private equity firms. With new management in place, BBB announced that it would close 60 stores in early 2020. After COVID hit, the company announced that it would close some 200 stores through 2022.
Bed Bath & Beyond
Until COVID caused the virtual lockdown of much of the U.S. economy, BBB was seen as recovering its customer base and sales were rising. That caused the price of its shares to rise as well. But the COVID lockdown caused a substantial decline in business. Accordingly, some of the same hedge funds (and others) that sold GameStop shares short, also shorted the stock of BBB, believing it overpriced. When the Reddit Mob began a buying surge in BBB stock at the end of 2020, the stock was priced at $17.76 per share; and some 11 million shares traded, up from 5.4 million shares the day before. By January 27, 2021, the price of BBB shares had rocketed to just under $53 each, only to fall back to just over $26.50 each by February 5. Similarly, the number of shares traded took off, reaching 89 million shares on January 25, 64 million shares on 26 January, and peaking at 90+ million on January 27, before declining to 3.9 million shares on February 5, 2021.
The GameStop Surge
As I noted in my two GameStop blog posts, the shareholders who bought to defeat hedge funds or even just to get in on the “hot new thing” and did not sell, lost a great deal of money, causing a loss of confidence in America’s capital markets. But in the case of BBB, the company itself is at risk. In October 2020, BBB announced that it had entered into an accelerated stock repurchase (“ASR”) agreement with JPMorgan covering $225 million worth of BBB stock. Many public companies engage in stock buyback programs for a number of reasons: they increase the immediacy of returns to shareholders, which shareholders like; they are typically seen as positive for the future price of its stock (the company believes that the current price is a relative “bargain”); they evidence a judgment that the company’s stock is a better investment than alternatives; and they reduce the company’s float (i.e., the number of shares outstanding), which may increase the company’s earnings per share just as a matter of mathematics. Also, however, an open market buyback program poses a number of difficulties: the market price may fluctuate significantly over the period that the program is in effect, making cost hard to predict; the company (or its chosen broker-dealer agent) must deal with ongoing disclosures and insure that its presence in the market causes no market disruptions and otherwise complies with securities regulation (including avoiding acting in a way that runs afoul of the U.S. Securities and Exchange Commission [“SEC”] going-private regulations). Participants in the capital markets have found a way to accomplish a stock buyback without the difficulties posed by an on-going open market program. That solution is an ASR.
Accelerated Stock Repurchases
Under an ASR the company wishing to retire shares buys the total number it wishes to buy in a single transaction with a dealer — in BBB’s case, JPMorgan. JPMorgan, in turn, borrowed the shares involved from institutional investors. The number of those borrowed shares must be returned to the institutions by a date certain, so the dealer buys the same number of shares in the open market during the period agreed to with the institutions. If the market price for the stock rises during that period, the company must compensate the dealer for the spread between what the company paid the dealer at the outset, and what the dealer paid to buy the replacement shares (typically using a volume-weighted average price). The company may satisfy this obligation either in cash or in company stock, depending on the terms of the deal. The ASR compensation obligation may have a “collar,” setting a cap and a floor on the net settlement with the dealer. If there is no collar, the company is at particular risk if there is a sudden surge in price in the company’s stock. The Wall Street Journal reported on Friday, February 5, 2021, on the “Heard on the Street” page, that Dollar Tree, Monsanto, and BBB used “uncollared” ASRs.
BBB settled the October 2020 $225 million by Monday, February 1, 2021, at an average price per share of $20.77. But, BBB also decided, on January 11, 2021, to buy back an ADDITIONAL $150 million of shares (again with JPMorgan) with a maturity date at the end of February 2021. On January 11, 2021, the closing price for the BBB stock was $20.49. When the price of BBB stock hit almost $53 per share on January 27, BBB negotiated a repayment extension until April 2021. Essentially, with an ASR, a company potentially has a “naked short” position. Many of the regulatory requirements for an ASR are spelled out in SEC Rule 10b-18, covering stock repurchases by a public company or an affiliate, even though in most ASRs ( and true here) the dealer is not an affiliate of the company. The requirements of the Rule are followed nonetheless. The Rule is lengthy and technical, but generally reasonable, so that following it is consistent with orderly capital market activity. BBB remains at risk should the GameStop surge recur in BBB stock, and in any event, the price of BBB stock on February 5 was just over $26.50 per share, or almost 30% higher than when the $150 million ASR was implemented.
As the February 5, 2021, “Heard on the Street” column wisely observed:
Companies that believe their shares are undervalued need to play the buyback game carefully.