Monday, September 25, 2023

JBS says it has made “significant progress” to resolve the cyberattack impacting operations and the “vast majority” of its meat plants will be operational Wed. (Michael Hirtzer/Bloomberg)

Michael Hirtzer / Bloomberg:JBS says it has made significant progress to resolve the cyberattack impacting operations and the vast majority of its meat plants will be operational Wed.JBS SA has made significant progress to resolve the cyberattack that impacted operations this week

Once a ‘stonk,’ Hertz reveals dilemma companies face in Reddit frenzy

NEW YORK (Reuters) – Months before the irrational trading in GameStop Corp, there was Hertz Global Holdings Inc.

Operating under bankruptcy protection last spring once the COVID-19 pandemic wiped out its business, the car-rental giant confronted an extraordinary situation: Its stock price was skyrocketing for no apparent reason.

Conversations at the time among Hertz management and directors on its board, reported here for the first time, turned from shock to a vigorous debate about whether the company should capitalize on its unexpected good fortune and sell shares to fund itself during bankruptcy proceedings, according to three people familiar with the deliberations.

Raising money through a share sale would be less expensive for Hertz, which was bleeding cash as travel and car rentals plunged, than tapping a costly bankruptcy loan that most companies in its situation use to navigate court restructurings.

Directors keen on selling shares fended off concerns from some in Hertz’s C-suite and boardroom that such a move risked misleading investors who failed to appreciate that creditors are always paid first in bankruptcy, two of the sources said.

Shareholders, on the other hand, usually lose their shirts.

But Hertz abandoned its plan to sell up to $500 million in new shares after the U.S. Securities and Exchange Commission (SEC) started scrutinizing it. Hertz declined to comment.

Over the past few weeks, soaring stock prices of GameStop – along with movie theater chain AMC Entertainment Holdings Inc, home goods retailer Bed, Bath & Beyond Inc and other companies – on the back of Reddit memes and YouTube videos have put company leaders in a similar situation.

The internal Hertz deliberations offer a window into the contours of the ethical and regulatory dilemmas they face. Namely, can they sell stock to raise capital in such a volatile market?

Regulators are watching. The acting head of the SEC has said in recent days that the agency is looking closely at how companies are behaving, including whether they are trying to raise money and adequately disclosing risks associated with it to investors.

“Taking advantage of what could potentially be a manipulated market would trigger both reputational and legal concerns,” said Donald Langevoort, a Georgetown University Law Center professor and former SEC attorney.

The SEC declined to comment.

As a social-media-fueled retail trading frenzy has whipsawed a series of “stonks” – a Reddit meme for stocks – over the past few weeks, the companies in the eye of the storm have largely kept quiet. But three sources familiar with some of these companies said discussions about surging shares are taking place in their C-suites and boardrooms as well.

Unlike Hertz, these companies are not under bankruptcy protection. So far, they are taking different approaches.

GameStop, whose shares slumped as much as 84% in the first week of February after surging more than 25-fold the previous month, has paperwork lined up to sell $100 million worth of new equity but has not yet disclosed whether it has done so. American Airlines Group Inc pulled the trigger on a plan to sell more than $1 billion of stock after its shares recently rallied as much as 48%.

GameStop and American declined to comment.

AMC, which previously warned it could file for bankruptcy after the pandemic temporarily closed its cinemas, has raised roughly $1.2 billion through debt and equity deals. It is now racing to file papers with regulators to sell shares possibly worth hundreds of millions of dollars more, two people familiar with the matter said.

“A company would be silly not to” consider selling additional shares, one source close to AMC said. “Any company that is thinking seriously would want to talk it through and decide what strategies are available.”

AMC did not respond to a request for comment. In late January, Chief Executive Adam Aron said recent fundraising meant “any talk of an imminent bankruptcy for AMC is completely off the table.”