How an unremarkable deal became a big threat to a small investment bank
History is littered with financial companies that were undone by one bad bet. Investors are worried that B. Riley Financial will be one of them.
B. Riley’s bet was on an unremarkable buyout of a company with an uninspiring name, Franchise Group. What made it toxic was the involvement of a hedge-fund manager who has links to a failed investment firm that prosecutors called a fraud.
Investors are anxious because B. Riley was a key funder of the deal and has extensive ties to the hedge-fund manager. New details of loans by B.
Riley to the hedge-fund manager show a longer and closer relationship than previously known. They also raise questions about whether Franchise Group should have disclosed more details about some of the loans years ago, when its board included two B. Riley executives.
B. Riley’s shares are down around 60% since August, the month the buyout closed, and it has been forced to defend its involvement. In January, the hedge-fund manager, Brian Kahn, resigned as chief executive officer of Franchise Group after a wave of news stories and social-media posts linking him to the failed investment firm.
B. Riley took a $281 million equity stake in Franchise Group, which owns Vitamin Shoppe and Sylvan Learning tutoring centers, as part of the deal. It later disclosed that it lent $201 million to Kahn’s investment firm, which pledged its Franchise Group shares as collateral.
Combined, the stated value of the loan and the equity stake exceeds B. Riley’s shareholder equity. B.
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