Throughout this article, please understand that the described reductions in share count have nothing to do with any type of meaningless “reverse split”.
Instead, with RH these are actual and permanent reductions in share count which are having a very predictable effect on the price of each remaining individual share.
And now suddenly these conversion prices are quite squarely within range.
But…you also know that in 20, RH had already purchased complete “bond hedges” from underwriter Bof A-ML to fully once those convertibles convert at prices over 6 and 8.
What I will describe below is how Friedman is now using a combination of positive cash flow and new debt to further reduce the share count.
Friedman is effectively conducting a “stealth/quasi/creeping” going private in order to drastically reduce share count.
The share price has already nearly doubled since those purchases.
Because of its increased leverage, the market has been very focused on RHs “capital structure”. As a result, when RH suddenly announced three weeks ago that it was already paying down its 0 million second lien term loan (within just 3 months of it being issued), the stock quickly shot up 20 points from the s to the s, quickly hitting new 52 week highs.
In other words, comparing the price of a single share between one period and the next is no longer a consistent picture of the valuation of RH as a whole.
Or RH could announce a subsequent reduction of leverage. Friedman could simply reiterate his recent very bullish views on RH’s near term prospects, both in the US and in Europe.
Given the 48% short interest in RH and the moderate trading volume, any of these announcements could easily fuel an immediate and very sharp spike in the share price.
All that is necessary for Friedman to receive this payout is the financial engineering and ongoing reduction of share count coupled with even just very slight improvements in RHs business (in fact, whether real or perceived). Friedman did not waste any time in putting his plan into action.
Within just two days of that award (on May 4, 2017) RH quickly announced a 0 million share buyback to sharply reduce the share float.