Bed Bath & Beyond (NASDAQ:BBBY) announced plans to raise $1 billion and avoid bankruptcy. The plan ends a short squeeze that had pushed BBBY stock to $5.86 per share on Feb. 6. The new stock gives shorts shares they can buy but returns the company to a fundamental valuation that may be zero.
BBBY stock opened Feb. 7 at $3.11 per share, representing a market capitalization of $400 million.
Is the Party Over for BBBY Stock?
The troubled home goods retailer believes it has commitments to buy the new equity and will then tap another $100 million from stretched credit lines. That should be enough cash to make payments on its debt, repay outstanding loans and stay in business.
The plan authorizes up to 900 million shares of common stock and 1 million of preferred, according to a filing with the U.S. Securities and Exchange Commission (SEC). The company currently has about 117 million shares outstanding.
It’s the preferred stock, and accompanying warrants, that are causing the price of common to fall. The plan puts new stockholders’ interests ahead of those of existing stockholders.
Traders at Stocktwits, who had watched BBBY double in value on Feb. 6, were not amused. Some bought because of the limited supply of stock available to short. Now, it will be unlimited.
What Happens Next?
Small investors who got into BBBY anticipating a squeeze have had the rug pulled out from under them. Those who shorted the stock have been saved.
The party’s over.
On the date of publication, Dana Blankenhorn held no positions in any companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.