Bed Bath & Beyond is planning a reverse stock split, the company said Friday, sending shares tumbling in after-hours trading. </p><div> <p>In a reverse stock split, each outstanding share is converted into a fractional share. So if a company declared a one for 10 reverse stock split, every 10 shares would be converted into a single. This move is generally made to increase the share price, according to the Securities and Exchange Commission.
"Our proposal for a reverse stock split will enable us to continue to rebuild liquidity to execute our turnaround plans and better position the company financially," CEO Sue Gove said in a press release.
The move comes just weeks after Bed Bath completed a public stock offering to raise over $1 billion. Share offerings inject more shares into the market and thus dilute existing shares.
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The reverse stock split would have the opposite effect. The proposal would reduce the number of shares outstanding, Bed Bath said in a filing with the SEC.
The proposal may also improve the perception of the company's common stock, Bed Bath said in the filing, as it is likely to result in a higher trading price. This, in turn, could help boost brokerage interest, especially among institutional investors and mutual funds, the company added. A higher share price could also help reduce the stock's volatility, according to the filing.
That said, the move does come with certain risks, including that the reverse stock split does not increase the price of common stock or reduce the overall trading market for the shares.
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In addition, markets tend to view reverse stock splits negatively, meaning investors could lose money as a result of the fluctuations in trading prices after the split, according to the SEC.
"Companies that do reverse stock splits are often in some financial distress, with dim prospects for recovery," explains a blog post from Titan Global Capital Management. "This could prompt investors to sell and move on."
Holders of the company's ordinary shares will, at the end of March 27, be allowed to vote on the proposal at an extraordinary general meeting later this year. The time, place and other details of the special meeting will be announced at a later date, Bed Bath said.
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Bed Bath & Beyond's board has not yet determined the ratio of the proposed split, but it will range between a one-for-five ratio to one-for-10, the company said Friday.
The reverse stock split "would have no effect on the actual or intrinsic value of our business or any stockholder's proportionate ownership of the company," Bed Bath said. Nor will it have any impact on the company's business operations or outstanding debt.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
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