By Matt Jarzemsky
Last summer, hedge-fund manager Soohyung Kim flew to Texas with
a radical message for RadioShack Corp.'s board: Stop selling
cellphone contracts.
After his Standard General LP became the retailer's largest
shareholder last year with a 10% stake, Mr. Kim repeatedly pressed
RadioShack's leadership to give up on the business of selling
phones attached to long-term service agreements, according to
people familiar with the presentations. The business, he argued,
was by far the biggest reason the company wasn't profitable.
Now, the New York hedge fund is putting its money where its
mouth is, seeking to lead the purchase of about half the company's
stores out of bankruptcy protection and refocus them on the cables
and gadgets that were once a staple of the Fort Worth, Texas-based
chain. Sprint Corp. would manage phone sales in a
"store-within-a-store" setup.
The fund has discussed contributing about $75 million toward a
$200 million bid for the new RadioShack, a person familiar with the
matter said, a deal that would essentially trade a rescue loan it
contributed to and arranged for the retailer last year for an
ownership stake. But some give the revamped retailer long odds of
success.
"I just don't know what they saw," said Michael Pachter, a
Wedbush Securities analyst who covered RadioShack for nearly a
decade. "I just think that these guys picked the wrong horse."
Standard General seeks to "unlock value in complex
circumstances," a spokesman for the fund said in an email. "We
believe that this investment has the potential to provide
significant benefits to both RadioShack and Sprint."
RadioShack declined to comment. Standard General declined to
make Mr. Kim available for comment.
Standard General, which funded Dov Charney's attempt last year
to keep control of American Apparel Inc., shares a pedigree with
some large hedge funds. Mr. Kim co-founded the fund eight years ago
with $100 million in seed money from Reservoir Capital Group, whose
co-founder, Daniel Stern, helped launch Anchorage Capital Group LLC
and Och-Ziff Capital Management Group LLC.
Mr. Kim, a native of South Korea, moved to the U.S. as a child
and attended New York's Stuyvesant High School. After a stint at
Bankers Trust, the Princeton University graduate followed trader
Stephen Freidheim to Och-Ziff, where he analyzed distressed
technology companies after the dot-com crash. Mr. Kim later joined
Mr. Freidheim's Cyrus Capital Partners LP.
Mr. Kim and fellow Cyrus alumnus Nicholas Singer struck out on
their own in 2007, giving their fund a bland name to convey a
no-frills culture, according to people familiar with the fund. The
fund manages about $1 billion, the people said.
The fund buys the stock and debt of companies going through
major changes, the kind of events that could mask their long-term
value. Unlike some other investors that target distressed companies
and buy up their debt, Standard General sometimes takes big equity
stakes and seeks to influence companies' leaders.
The fund raised its profile last year when it waded into the
power struggle at American Apparel. The company's board had
suspended Mr. Charney as chief executive amid allegations of
misconduct. A loan from Standard General allowed Mr. Charney to
amass a 43% stake in the company he founded.
The deal gave Standard General voting control tied to the
shares, but the fund made no promises about whether Mr. Charney
would keep his job.
Standard General later lent $25 million to American Apparel,
which agreed to replace all but two directors on its seven-member
board. The company fired Mr. Charney in December.
Standard General's SG Offshore Fund, which includes its
RadioShack and American Apparel investments, has gained 74% from
its inception through November, edging out the S&P 500's 71%
climb over the same period, according to excerpts of a letter to
investors reviewed by The Wall Street Journal.
RadioShack may prove to be Standard General's biggest challenge
to date.
The fund got RadioShack's attention last year after it bought up
some of the company's stock and debt. In meetings with RadioShack's
management and board over the summer, Mr. Kim argued that the
retailer had overestimated the prospects for its postpaid cellphone
business, which didn't generate much profit despite high sales,
said people familiar with the conversations.
The retailer had already reworked employee commissions to
de-emphasize cellphone sales. But Standard General wanted it to
take more significant steps, such as exiting the postpaid cellphone
business altogether, the people said.
RadioShack hired a consultant to study Standard General's
recommendations, the people said. The retailer, meanwhile, was
running out of cash. In October, it took the rescue loan arranged
by Standard General.
After a lackluster holiday season, RadioShack began preparing to
close hundreds of stores. Standard General agreed to help fund the
company's bankruptcy-protection process, buy as many as 2,400
stores and join with Sprint to run them.
Some observers doubt RadioShack can survive under any
circumstances, given the competition from both Web and
brick-and-mortar retailers.
Bankruptcy proceedings bring additional uncertainty. Other
bidders could challenge Standard General's offer. Some creditors,
meanwhile, have objected to the quick pace of the sale process,
including a proposed March 16 auction.
In court papers, Standard General said there is "substantial
risk" in backing the retailer. But the fund said it "saw--and still
sees--potential in RadioShack."
Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com
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