(Bloomberg) -- Bryant Riley, the co-founder and largest shareholder of B. Riley Financial Inc., informally offered to buy the shares of the embattled investment firm he doesn’t already own.
Riley is willing to buy the stock at $7 a share, according to a regulatory filing Friday. While that represents an almost 40% premium to Thursday’s closing price, it’s far from the roughly $50 that the Los Angeles-based brokerage and investment firm was trading at a year ago.
The shares rose 16% to $5.85 in New York, pegging the company’s market value at about $177 million. In a statement, B. Riley said it would evaluate the proposal, and that there’s no assurance a transaction will result.
Riley outlined conditions of a potential bid in a letter to the board, noting that it “does not constitute an offer or proposal capable of acceptance and may be withdrawn at any time.” He won’t proceed unless it’s approved by independent directors and a majority of shares he doesn’t already control, Riley wrote.
The transaction would be financed with debt, and possibly equity “from third-party capital providers with whom I have deep and long-standing relationships,” Riley wrote, without naming the potential backers.
The move comes just days after the company suspended its dividend, disclosed its biggest-ever quarterly loss and confirmed the US Securities and Exchange Commission is investigating the business. That sent B. Riley’s shares into a tailspin this week.
Public Reports
“I want to make it clear that I plan on continuing to report financials to the SEC and our bonds and preferreds will continue to be publicly traded,” Riley said in his letter to the board. “It is possible that I will continue to list on a secondary exchange if there are shareholders that would like to participate in this transaction.”
In addition to the shares, B. Riley has issued various forms of debt totaling more than $2 billion as of the first quarter, filings show. Part of the company’s financing has come from unsecured “baby bonds” sold to investors in denominations as small as $25. Some of those have also suffered big price declines as the firm’s troubles mounted.
Federal regulators are investigating whether B. Riley adequately disclosed the risks embedded in some of its assets, Bloomberg News has reported. The agency is also seeking information on the interactions between Bryant Riley and longtime business partner Brian Kahn, the former chief executive of Franchise Group Inc., people familiar with the matter said.
Riley told investors during an Aug. 12 conference call that he and the company received subpoenas from the SEC seeking information about B. Riley’s dealings with Kahn. The latter has faced controversy over his alleged role in events that led up to the collapse of a hedge fund he advised, Prophecy Asset Management. Kahn insists he hasn’t done anything wrong, and B. Riley has said it didn’t have anything to do with Kahn’s activities at Prophecy.
“We are responding to the subpoenas and are fully cooperating with the SEC,” Riley said at the time. “We are confident that the SEC will reach the same conclusion that our own internal investigation, with the assistance of two separate law firms, did – that we had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates.”
Short Sales
B. Riley’s stock has been the most shorted US equity, according to data from S3 Partners. Marc Cohodes, one of the short sellers who has been criticizing the company’s finances and transactions, said that Riley’s letter to the board didn’t name his potential financial backers, casting doubt on its validity, and Cohodes questioned whether the letter will ever be followed by a formal bid.
In the meantime, Cohodes said, the boost to the stock may help Riley get a better price for some of his shares.
Riley has a personal stake in his offer’s outcome, ranking as the biggest holder, with about 24% of the common shares, according to his letter, and he’s pledged much of it to secure a loan. Filings show he took out a loan in 2019 from Axos Bank in which he used more than 4.3 million shares as collateral. A plunging stock price can trigger a collateral call on this type of loan, potentially forcing the borrower to sell shares at a deep discount.
Earlier this week, an Axos spokesperson said Riley’s loan is secured by multiple collateral types in addition to stock. “This collateral, other than B. Riley stock, is sufficient to secure a majority of the underlying loan,” the spokesperson said.
Payout Ended
Riley also lost a substantial amount of income when the company omitted its quarterly dividend, which was $1 a share as recently as November. It was subsequently cut in half as B. Riley’s troubles mounted.
Among B. Riley’s troubled assets is Franchise Group, or FRG, which is one of the firm’s biggest investments. The firm holds a stake of about 31% in FRG after helping Kahn stage a management-led buyout. B. Riley is now expecting a non-cash writedown of about $330 million to $370 million, according to a company statement.
S&P Global Ratings said in a July 24 credit downgrade that FRG is in danger of violating the terms of its loan, and its capital structure “appears to be unsustainable.”
--With assistance from Donal Griffin.
(Updates with company comment in the third paragraph)
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