The Day Ahead: Value America board members throw cash into the pit

Good money after bad as e-tailor works through a period of reorientation
Written by Larry Dignan on

Struggling e-tailer Value America would like you to believe that some of its board members gave the company a vote of confidence by forking over $30m (£19.9m) for convertible preferred shares. Actually, board members are just trying to recoup losses.

The board members -- Paul Allen's Vulcan Ventures, Pacific Capital Group and Frederick W. Smith, Chairman of FDX and Federal Express -- had to hand over the cash. If Value America went broke, these not-so-poor folks wouldn't get a dime back. Given the options, why not throw some more money into the pit?

Value America, trading near a 52-week low, has been a bit of a trendsetter. In December, it was among the first dot-coms to unravel. Now it's among the first with new financing arrangements in the guise of a "vote of confidence." Egghead.com, CDNow, Peapod.com and Drkoop.com have received -- or are expected to receive -- additional funding.

Value America, which has no hope of being acquired right now, will issue new convertible preferred stock to its not-so-merry band of board members to stay in business. The company will also sell Acqua Wellington North America Equities Fund up to $60m of its common stock. The grand total is $90m in financing. Considering Value America burned through about $31m in the first quarter and revenue was below company projections, that money may not last long.

On a conference call officials said more details on the financing will be announced shortly. Execs, which didn't take questions from analysts (who can blame them?), said cash burn would diminish with profits in early 2002. We'll believe it when we see it -- Value America said it will resume "full marketing operations" now it has cash.

The board members funded Value America because they were already in too deep. As of March 31, Vulcan owned more than 8 million shares, William Savoy, president of Vulcan, owned more than 65,000 shares, and Smith and FDX owned 665,000. Some warrants vested at a penny, so don't cry for these shareholders, but their profits have dwindled significantly. Vulcan's stake is worth $29m less since the first trading day of 2000. Vulcan's stake today is worth $424m less than it was when Value America closed its first day of trading in April 1999 just above 55.

Simply put, don't buy into this quote."These financing commitments represent a significant vote of confidence in the steps to stabilise and refocus Value America," said Smith in a statement.

Yeah right. Smith should have said: "We have thrown so much money into this company that we need to fund it (again) just to get some kind of return."

What does this financing mean for the investors who will bet on a Value America comeback today? Dilution. Lots of it. These preferred shares add up. Value America is issuing worthless stock and diluting the holdings of the little guy, who has already lost a bundle. Value America has more than 45m shares outstanding. That total could double.

And this is progress?

Yes, Value America has made some progress fixing itself and focusing on the small business market. It used to sell "choices from technology to office products, from consumer electronics to jewellry."

Now instead of competing with Amazon.com as a one-stop e-tailer, Value America only competes with Buy.com, Egghead, Cyberian Outpost and a host of others.

Value America still faces steep odds. Here's how Value America became a money pit. The e-tailer went public in April on the promise it would sell everything and doubled. A few months later, Value America missed estimates, but Wall Street was forgiving. Underwriters continued to give Value America a break, even when it missed estimates again last August. The company unraveled amid waning sales in December.

And now we're expected to be enthusiastic about an upside surprise and more funding? Value America beat Wall Street estimates by 10 cents -- yippee. The company still lost $27.4m, or 60 cents a share, on sales of $47m. On the conference call, Value America said it spent most of the quarter fixing vendor contracts, dealing with customer service issues and working through a "period of reorientation."

Investors who buy into this stock today should go through their own period of reorientation.

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