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1 day ago5 min read

B. Riley Financial: Analyzing the Potential for Significant Shareholder Gains

Summary:


  • On October 14, 2024, B. Riley Financial (XNAS: RILY) announced the sale of its Great American unit to Oaktree Capital for $386 million.

  • This deal is aimed at reducing the company's debt load, with B. Riley receiving approximately $203 million in cash and $183 million in preferred units, along with a 47% minority share in the newly formed holding company.

  • We initiate a strong buy recommendation with a projected post-transaction share price of $10.89, indicating a potential upside of 100.18% based on the closing price on October 16, 2024.


Catalyst


On October 14, 2024, B. Riley Financial, Inc. (XNAS: RILY) announced the sale of its Great American unit, which specializes in asset valuation, to Oaktree Capital in a $386 million deal aimed at reducing debt and strengthening its balance sheet [1]. B. Riley will receive approximately $203 million in cash and preferred units valued at nearly $183 million in a new holding company for Great American, along with a 47% minority share of common units in the holding company [1]. Oaktree will own a 53% common equity stake in the reorganized Great American [2].


B. Riley has been raising cash by selling core assets to manage its roughly $2 billion debt load, which has been exacerbated by write-offs on poor investments and an investigation by the U.S. Securities and Exchange Commission [2]. In August, the company suspended its dividend to prioritize reducing leverage and recently renegotiated a key loan, which involved paying down the balance and terminating a revolving credit line [2].


Analytical Framework Outlined


First, we refer to RILY’s latest quarterly filing to establish a baseline for total equity or book value on a per-share basis, alongside a reference price-to-book (P/B) ratio. The reference price is set using the closing stock price of $4.39 USD on the most recent trading day before the press release was disclosed.


Next, based on the details from the press release, we project potential changes to the company’s book value and corresponding book value per share. By applying the reference P/B ratio, we then derive a range of possible price estimates that reflect the impact of this news.


Setting the Table

Based on the latest filing, B. Riley Financial, Inc. (RILY) reported a total equity value of $299.66 million on its balance sheet [3]. With 30,295,303 shares of common stock outstanding (par value $0.0001 per share), the reference book value per share is estimated to be $9.89. Using the closing stock price of $4.39 on October 11, 2024, as the reference price, we calculate a reference price-to-book (P/B) multiple of 0.5x. This valuation reflects near historically low levels, comparable to those seen in Q3 2011.


Impact Analysis


With the reference variables in mind, we conduct an impact analysis on a per-share basis to better understand the post-disclosure impact on B. Riley Financial's book value per share, taking into account the various aspects disclosed in the press release. The analysis is divided into three key components: the value added from the cash consideration, the value of the preferred securities that RILY will receive, and the impact of the company's 47% interest in the newly created holding company for the Great American division.


First, we anticipate that the cash received from the transaction will directly enhance the company’s post-disclosure intrinsic value, despite uncertainties regarding its future use. The cash can be viewed as an immediate accretion to the company’s net asset value. It could also be used to unlock further value through debt repayment, which would reduce liabilities and increase book value, or by lowering the cost of capital through reduced cost of debt stemming from lowering financial leverage. Alternatively, the cash could be reinvested into the newly created holding company, potentially increasing value over time through retained earnings. For these reasons, we account for the full cash value at face value, expecting it to have a direct positive effect on book value.


Second, the preferred equity issued by the new holding company is also expected to add to B. Riley Financial’s book value. However, we believe that only 53%—representing the stake not held by RILY in the new holding company—should be considered additive to the book value. This approach avoids double-counting the value of the preferred securities, as including the entire value would overlook the fact that a portion of this capital is simply a reclassification of RILY's existing assets under a new structure. Since RILY's capital injection into the holding company directly contributes to its formation, the value of the preferred securities partially reflects RILY’s own capital. Therefore, we estimate the book value addition to be $96.99 million, or 53% of the preferred securities' value.


Third, the new holding company for Great American is expected to benefit the balance sheet through retained earnings as recognized under the equity method. This expectation is further supported by the fact that preferred stocks do not carry voting rights. However, the extent to which this will enhance the balance sheet remains uncertain, and there is a possibility that the estimated benefits of the transaction may not be fully realized, potentially leading to a deterioration in value. Conversely, if the market successfully recognizes the value of the spun-off entity, the opportunity for value creation could be significant. Given these uncertainties and to maintain a conservative approach in our analysis, we assume that the impact on book value from this component is negligible.


Given the reference values and the anticipated value additions, while maintaining a constant price-to-book (P/B) multiple estimate, we project the post-transaction share price for B. Riley Financial, Inc. (RILY) to be $10.89 USD. This estimation is based on the following calculations:


Other Considerations:


It is important to note that our analysis thus far significantly underestimates the value of B. Riley Financial, Inc. (RILY) for a couple of reasons. First, we do not account for the potential value creation opportunities within the new holding company, from which the company is expected to benefit directly, as previously mentioned. Second, our analysis overlooks the impact of deleveraging and the transfer of risk from RILY's current balance sheet to that of the new holding company. This effort should significantly reduce liabilities on RILY's balance sheet, thereby substantially enhancing the company's share price under our assumption that book value serves as a driver of growth.


Furthermore, it is important to highlight that we assume a constant price-to-book (P/B) multiple both before and after the transaction. To provide additional context, we have included the following table, which outlines the estimated price per share across various P/B multiples, each presented in increments of 0.1x.

Short Interest


It has come to our attention that RILY's short interest as a percentage of float is significantly high at 67.33%, with short interest accounting for 54.85% when considering dark pool volume activity. The short interest ratio stands at 2.66 days. Given these factors, along with the fundamental catalysts we have explored, there is potential for substantial price movement as shorts are covered, especially with concurrent rising demand for the security.

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