Monday, December 7, 2009

Notable financing, of the "mandatory" sort (SCSS)


I wonder how many shareholders of mattress company Select Comfort (SCSS) were aware that the company is contractually obligated to dilute shareholders, to protect creditors.

This afternoon, SCSS announced they would offer common stock. Note the use of this cash:

"The company plans to use the proceeds of the public offering to improve working capital and pay down debt. The proceeds from this public offering are expected to fulfill the obligations under the company’s amended and restated credit agreement, dated Nov. 13, 2009, to issue common stock or other equity securities yielding certain proceeds"

When SCSS received a waiver from its lenders on November 12th, in the details it specified (among other requirements) that the company must raise equity:

Also in that release are details from financing SCSS got from hedge fund Sterling Capital Partners. Highway robbery:

"As a condition to the effectiveness of the Amended and Restated Credit Agreement, on November 13, 2009, the Company consummated the transactions contemplated by the Securities Purchase Agreement dated October 2, 2009 (the “Securities Purchase Agreement”) with Sterling SC Investor, LLC, a Delaware limited liability company (“Sterling”) and an affiliate of Sterling Capital Partners III, L.P., including the issuance and sale to Sterling of 2,500,000 shares of the Company’s common stock at a purchase price of $4.00 per share together with 2,000,000 warrants to purchase shares of the Company’s common stock. The warrants have an exercise price of $0.01 per share of common stock and have a term of five years."

At five bucks, SCSS is a far cry from years-ago levels near $30, so I can see why management might be hesitant to raise money by way of simple common stock. But the provisions in the credit waiver for required equity sales, combined with the giveaway to Sterling, are ridiculous. If I were a common stock holder I'd have preferred some big upfront dilution from an offering, but a squeaky clean balance sheet going forward.
Copyright 2009 AlphaNinja

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