Roadrunner's rights offering would recapitalize the company and get rid of its preferred share burden

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Financially-beleaguered Roadrunner Transportation (NYSE: RRTS) will seek a recapitalization to raise approximately $450 million in new funding in order to lift the burden of the preferred share payments that gave the company its lifeline last year.

The so-called rights offering will offer new shares to existing shareholders, according to a Roadrunner statement. The number of shares to be offered through the existing shareholder base was not disclosed, either in the company’s press release or in its S-1 filing with the SEC.

In a rights offering, the existing shareholders are given the opportunity to buy new shares at a favorable ratio to each share they own. If they buy their full allotment, their current ownership stake in the newly-capitalized company is not diluted. But if they do not exercise those rights, then their percentage of ownership declines as the new shares are issues.

If the shareholder base chooses not to pick up that entire allotment of new shares, there’s a “backstop commitment” from Elliott Management—whose funding of the preferred share offering stabilized the company last year—to ensure that the entire rights offering is fully subscribed.

Elliott already owns approximately 9.5% of Roadrunner, the company said. The preferred shares are 100% owned by Elliott.

“The purpose of the rights offering is to improve and simplify the company’s capital structure in a manner that gives the company’s existing stockholders the opportunity to participate on a pro rata basis,” Roadrunner said in a prepared statement. “By improving and simplifying its capital structure, the company believes it will increase the speed and likelihood of a full operational recovery.”

The imbalances in the company’s financial structure were evident in the company’s latest 10Q report. It showed preferred stock liabilities of $178.4 million on a total balance sheet of $850.3 million. Common stock value wasn’t even $1 million, and goodwill was $264.8 million, a high percentage of the total balance sheet compared to other companies. The preferred shares were reported to be mostly paying interest rates of 15% or more.

Cash and cash equivalents were just $35.6 million. The low amount of shareholder equity on the balance sheet is not surprising, given that the stock has traded as low as 75 cts in the last few months. It closed Wednesday at $1.15 and dropped to less than $1 Thursday morning on the news of the rights offering. A year ago, it was trading near $8.40. In early 2014, it was almost $29/share.

Based on the Roadrunner statement, it appears that the interest charges on those preferred shares were not being paid. “The company intends to use the proceeds from the rights offering and the backstop commitment to pay in cash all accrued and unpaid dividends on the company’s outstanding shares of preferred stock, to redeem all of the company’s outstanding shares of preferred stock, to pay all expenses incurred by Elliott in connection with any backstop commitment and to pay all fees and expenses of the company in connection with the rights offering,” it said in the statement.

The company’s problems can be traced back to a series of accounting scandals in recent years. Two Roadrunner executives were indicted earlier this year on charges related to false and incomplete disclosure of the company’s financial conditions.

Roadrunner was expected to take some steps to reverse the company’s fortunes, which are clearly reflected in the stock price that has been less than $1. “Despite the ongoing efforts of our management to reduce our costs and turn around the business, our value for common stockholders has continued to erode,” the company said in its statement.

On an operating basis, the company’s second quarter earnings were mostly positive. But the weight of the preferred share payouts is putting the company into the red.

A committee to review options, and the hiring of Barclays as an adviser, were both completed in July. At the time the committee was created, a rights offering was suggested as a possible way of altering the Roadrunner capital structure.