B. Riley: Survival Potential Uncertain But Valuation Now Reasonable (NASDAQ:RILY)

In July, I published “B. Riley Financial: Securities Lending Business Raises Eyebrows Due To Liquidity Risk”. At the time, I was very bearish on B. Riley (NASDAQ: RILY) due to the combination of significant balance physical risks, an overstretched operational structure and a weak environment faced by its consulting segment. RILY is down about 67% since then, down about 90% from when we first became. bear in 2021.

To be fair, the latest spate of problems is only indirectly related to the balance sheet risks we covered. Shares tumbled after it announced surprise cashless write-downs followed by a wider regulatory investigation into its risk disclosures. That led to a cascade of problems, including a dividend suspension, a delayed second-quarter report and extreme losses that halted trading in the stock.

RILY’s volatility has calmed down last month, although short interest on it remains above 40%. More recently, creditors he renounced some covenants on some of Franchise Group’s debts, giving its owner, B. Riley, a minor reprieve. B. Riley too run to reduce exposure to Synchronization technologies (SNCR), from which he had significant losses. His creditors have too extended his term for the delayed T2 report, although it remains outside of Nasdaq listing compliance.

Right now, the main question facing B. Riley investors and speculators is whether the equity will survive or not. The company faces huge risks and pressure from creditors, although there appears to be little immediate pressure to push it into default, as seen in the willingness of some creditors to allow it to breach covenants. The company’s chairman and co-CEO Bryant Riley has also offered to take the firm private for $7, though questions remain about his ability to finance the deal and its terms. While this is a premium to the current price, many equity investors can expect a more significant return. At the same time, with short interest staggeringly high, many are likely betting on its potential failure.

B. Riley’s debt signals a high chance of failure

B. Riley has significant debt maturing in the coming years. Its outstanding debt is about $1.55 billion, about half of which is due in 2026. The company has agreed to sell some of its brands, expecting gross cash proceeds of $410 million. It plans to use those proceeds to repay $125 million of its Nomura senior secured debt and to use cash and proceeds from sales of other assets to repay its maturities in 2025. Bonds associated with that debt have since risen, but remain at highly speculative price levels. See below:

Both the shorter-dated 2025 debt and the longer-dated 2028 bond have lost significant value over the past two months. Since both have collapsed, there appears to be considerable uncertainty about the market value of the business. However, its market capitalization is about $183 million, while the total financial debt is about $2.1 billion, which means that the market does not offer high odds to avoid bankruptcy. That said, if the company can prevent this through favorable asset sales or a successful private offering, equity investors can see a significant upside.

What are B. Riley’s assets?

At this point, the critical question for B. Riley is how much its assets are worth. The company is now scrambling to sell assets and raise cash to meet its debt obligations. Of course, RILY is valued mainly on intangible assets from brands and companies acquired in recent years. As of Q1, it had a book value of $228 million, but a negative tangible book value of -$555 million due to goodwill and intangible assets of $783 million.

Essentially, most stock speculation is that these assets are worth less than what you bought them for. Some, like Great American Group, have seen their value rise since B. Riley has taken control, having had some success in innovating the liquidation and valuation company. That subsidiary is also valuable because its business model is somewhat countercyclical, so it’s no surprise B. Riley looked to sell it because it was among its better-performing assets.

There are others, such as its consumer discretionary portfolio. It has numerous brands in this segment, which we mentioned when we last covered the stock. Some, like Targus, probably aren’t worth what the company paid as they increasingly compete with better-priced Chinese electronics accessory companies. Indeed, most of B. Riley’s problems in its consumer portfolio likely stem from increased competition in the e-commerce space for small consumer discretionary goods.

The disaster of the franchise group is notable. These include brands such as The Vitamin Shoppe, Wag N’ Wash and Pet Supplies Plus. B. Riley took a minority stake in the company after a $2.8 billion management takeover last year. It now takes a loss of $14 to $15 per share on that investment, including a write-down of bad loans. Additionally, it came with an investigation into Bryant Riley’s business ties to former FRG head Brian Kahn, who oversaw the collapse of a prominent investment fund in 2020. In my view, it is noteworthy that the report its 2023 annual 10-K does not mention “RFG” or “Franchise Group,” despite the fact that this investment represents considerable risk for B. Riley.

I think the value of many of these consumer brands is probably declining. The company may point to weak consumer sentiment and subpar discretionary spending patterns. While macroeconomic consumer pressure is a factor, I expect these pressures to increase over the next year based on my outlook that unemployment will continue to rise in a recession. It’s worth pointing out that those consumer brands faced losses in 2022, 2023 and this year, when consumer spending was relatively stagnant but not falling.

B. Riley is undoubtedly focused on discounted consumer brands. However, I would argue that the approach is weak because the consumer discretionary environment is facing immense competitive pressure as the barriers to entry have fallen (see the immense growth of Amazon seller accounts). Looking ahead, I expect the consumer space to see weaker consumer demand, which will likely make it an inopportune time to try to liquidate these investments.

B. Riley’s Advisory and WM Business Pressured

In my opinion, the immense amount of negative media attention B. Riley is facing may be coming into his wealth management and advisory businesses. Although it has focused too much on a private consumer brand like business, it is an investment bank. A large portion of its sales come from investment banking and corporate finance advisory, sales and trading activities, equity research and wealth management.

My point is speculative, but I wouldn’t want B. Riley managing my money or giving me crucial advice in its current state. If B. Riley can’t manage their own money, many customers may feel it’s not appropriate to do the same for them. This is not only because of its apparent failures by overextending itself into too many over-leveraged companies, but also because it is in very poor financial condition. Some potential customers may perceive B. Riley as having higher counterparty risk associated with current pressures.

This is speculative, but it is often true that banks cannot regain lost trust. I think its core advisory business could see more significant strain over the next six months as some clients may turn to other managers who don’t receive the same degree of negative media attention. In addition, some key employees may look to change employers given the increased risks of layoffs and strained reputations.

conclusion

The fact is that B. Riley has a huge risk in the underlying value of its assets, while it has significant liabilities. It is now selling one of its stronger acquisitions to raise capital, which could extend its life to 2026. Many of its consumer brands have been weak, and I expect them to continue to weaken as the economy may enter soon into a recession, causing asset sales to deteriorate. – timed. The bank’s reputation is tarnished, which may exacerbate problems in its advisory business, which is already under pressure as most of IB’s business slows. As I mentioned in my last article, I also think there is some liquidity risk to its large securities lending business in the event of a major stock market crash.

I don’t think RILY will come back from this. In other words, I expect its remaining equity value to most likely be lost by the end of 2025. That said, its debt is so high that its key lenders, such as Nomura, have little reason to step up shows and push her into bankruptcy. before trying to improve its balance sheet.

Thus, I don’t think RILY is a short opportunity at its current market cap. Indeed, that trade is extremely crowded. See below:

Any positive movement in a take-private offering, a better-than-expected 10-Q (given that expectations are low) or leniency from lenders could push the stock much higher. Even if these potential gains are temporary in a dead cat replica, the short sellers’ losses would be huge and could cause a squeeze given that interest is so high. The time to short RILY was 2021 when I first became bearish due to peak IB activity.

The stock could easily be undervalued at its current price if it can reduce its liquidity risks. While I don’t necessarily think it’s likely, his equity value is so low that the upside would be great. Thus, today I have a neutral outlook on RILY. That said, I probably wouldn’t invest in its bonds like (NASDAQ: RILYZ), (NASDAQ:RILYM), (NASDAQ:RILYG), or others because those debts are unsecured.

To me, its future is probably binary; either the equity will survive and potentially recover (or be bought), or its outlook will continue to decline as it struggles to sell non-core businesses while its core operations may falter. This may depend primarily on whether the US economy is in recession. Those who strongly believe in a “soft landing” may find RILY attractive today, as its advantages may be more significant than its disadvantages. However, I think that is unlikely as I expect its consulting and consumer businesses to clash increasing stem. However, it’s still clearly not overrated today, given that either scenario could play out.