B. Riley, the financial services firm, witnessed a dramatic 35% plunge in its shares on Monday, marking the fourth consecutive session of losses. This downturn was prompted by the revelation of unrealized investment losses and a key asset downgrade by S&P Global Ratings.
The Los Angeles-based boutique investment bank disclosed last week that it had devalued its investment in the $2.6 billion take-private deal involving Franchise Group (NASDAQ: FRG) Inc, the owner of Vitamin Shoppe. This devaluation was attributed to Franchise Group’s third-quarter report, which indicated a decline in revenue and a net loss.
The repercussions of this markdown were evident in B. Riley’s financials, with the firm reporting a net loss of $75.8 million in the third quarter, a stark contrast to the $45.8 million profit recorded the previous year.
On Monday, B. Riley’s stock plummeted to $16.65, reflecting a nearly 50% reduction in value since the announcement. Although the shares have since rebounded somewhat, they were still down nearly 14% at $21.90.
S&P Global Ratings exacerbated the situation by downgrading Franchise Group’s credit rating on Friday, pushing it further into junk status at ‘B-‘ from ‘B’ with a negative outlook, citing the company’s weak performance.
In response, a B. Riley spokesperson stated, “We do not believe that the recent movement in our share price is warranted based on the fundamental strength and performance of our diversified platform.”
S&P also revealed it was closely monitoring legal developments surrounding Franchise Group’s CEO, Brian Kahn, who spearheaded the August take-private deal.
Recent reports from Bloomberg implicated Kahn as one of two co-conspirators identified by John Hughes, co-founder of hedge fund Prophecy Asset Management. Hughes pleaded guilty to securities fraud, though it remains unclear whether Kahn is facing charges.
Kahn vehemently denied any wrongdoing, asserting, “At no time during my former business relationship with Prophecy did I know that Prophecy or its principals were allegedly defrauding their investors, nor did I conspire in any fraud.”
Bryant Riley, the eponymous CEO of B. Riley, emphasized during an analyst earnings call last week that their investment in Franchise Group was based on the business’s fundamentals, and Kahn had no “direct experience with what has been alleged.”
Adding to B. Riley’s challenges, the company has become a target for short sellers. In February, Wolfpack Research accused the firm of failing to cut losses on “failing” investments and continuing to extend capital to distressed clients.
Rick Meckler, a partner at Cherry Lane Investments, commented, “Although B Riley attempted to address short seller concerns on their recent earnings call, the information they provided was limited. It remains to be seen whether this is a real problem for RILY, but investors and clients sometimes don’t wait around for greater clarity.”
