Despite shaky investor sentiment and a troubled history in the public markets, Wayfair’s sudden spike in sales under a new work-from-home environment led the online furniture retailer to secure PE capital within a matter of weeks, according to a source close to the transaction.
The Boston-based company announced last week that it is raising $535 million through convertible notes led by private equity firms Great Hill Partners and Charlesbank Capital Partners.
While the public health crisis caused businesses widespread to shut their doors, Wayfair, an e-commerce provider, found itself a beneficiary of life under quarantine.
Michael Choe, managing director and CEO at Charlesbank Capital, has long believed in Wayfair’s business model, with great admiration for the company’s pricing, marketing and supply chain strategies. Still, he told PE Hub, he believes “the best days are ahead of them.”
Private equity love
Partners at both PE firms said they share a close relationship with the co-founders of Wayfair and believe in its growth potential, even as prevailing wisdom among public investors held that the company is suffering.
“In my understanding, Wayfair looked at parties to raise funding given the investor sentiment in the market,” according to a source.
Although Wayfair shareholders assumed the company would face a liquidity crunch, the new capital injection ought to take care of liquidity issues, said another source close to the deal.
Wayfair has been criticized for failing to turn a profit – with a widening loss that approached $1 billion in 2019 on $9.1 billion in revenue. For the fourth quarter, the company reported an annual revenue increase of 26 percent – the slowest quarterly growth since its IPO. The company laid off about 550 employees the same month, adding to the existing worries of investors.
Charlesbank’s Choe said he understands these cost reductions. “We didn’t focus so much on the quarterly and annual factors,” Choe said. “We focused on the underlying business model and we have conviction in its growth,” he said, emphasizing Wayfair’s repeat sales from existing customers.
Shares of Wayfair, which tumbled about 87 percent over a 12-month-period to a low of $21.70 on March 19, have gained ground amid the pandemic. Shares rose 51 percent to $76.47 on April 6 following news of the fundraising, and finished at $81.51 on Monday.
The company also said last week it expects to meet or exceed its first quarter financial outlook.
Leading up to the recent investment was a competitive and quick process aimed at investors with industry knowledge and those whom Wayfair shared a close relationship, one of the sources said. “When [the covid-19] crisis hit the company, it felt it was prudent to secure liquidity,” the source said.
“They had decided on a $500 million investment, give or take,” another source added.
After the deal was structured, Wayfair invited The Spruce House Partnership, a hedge fund and one of Wayfair’s largest public shareholders, to participate, and they exercised the option, said the source.
In connection with the transaction, the $535 million senior credit note will bear interest at an annual rate of 2.5 percent and feature a $72.50 conversion price, representing a 46 percent premium to the average closing price of Wayfair’s common stock.
The convertible senior credit notes give the PE firms downside protection should the company’s stock tumble, as well as a way to participate in the upside of the business.
Simply put, if the traded share price of Wayfair rises above the $72.50 conversion price, the PE firms will be able to buy the stock at a lower conversion price instead of the market rate – thereby earning a premium.
Growth after the virus
Charlesbank’s Choe suspects “Wayfair could benefit from the furniture shopping spree amid [the] pandemic.”
“Our view is that new customers coming during covid-19 will translate into repeat existing customers providing long-term growth prospects,” he said.
Michael Kumin, a managing partner at Great Hill Partners, agreed.
Kumin, the lead independent director on Wayfair’s board since 2014 – the year the company went public – said the company’s competitive advantage and tech-enabled distribution networks are suited to take market share across any economic landscape.
Neither Charlesbank Capital nor Great Hill Partners want to invest in other home goods businesses at this point.
Action Item: Check out Wayfair’s press release for more details on the transaction. Full details will be made available in a Form 8-K filing.