Starry Group: De-SPAC On The Verge Of Bankruptcy (NYSE:STRY)

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On Thursday, junior broadband service provider Starry Group Holdings (NYSE:STRY) or “Starry” became the latest de-SPAC deal to admit to severe financial difficulties:

This is an extremely difficult economic climate and capital environment, and at present we don’t have the capital to fund our rapid growth. Because of that, we’re focusing our energies on our core business: serving multi-tenant buildings in our existing dense urban markets.

Last week, we made the tough decision to withdraw from the FCC’s RDOF program. While participation in this important program fit within our strategic vision in 2020, changing capital needs, changing capital environments, and continued success in the urban multi-tenant market forced a decision to take a step back and focus our energies and capital on executing on our core business plan. And this week we made the very difficult decision to let go approximately half of our workforce – many of our colleagues who helped build Starry.”

In addition to terminating approximately 50% of its workforce and freezing hiring and non-essential capital expenditures, Starry also withdrew its full year 2022 projections for revenues to reach at least $50 million which included expectations of $15 million in federal regulatory revenue through the FCC’s Rural Digital Opportunity Fund (“RDOF”).

The company also announced the exploration of “strategic options” which should be viewed as a major red flag given the financial condition of the company.

Assuming Q3 cash usage to have been roughly in line with the first half (approximately $50 million per quarter) and no major share issuances under the company’s recently established equity line of credit with a subsidiary of Cantor Fitzgerald, I would assume Starry to report cash and cash equivalents of slightly below $50 million at the end of September.

At these cash burn levels, the company would have been in danger to run out of funds by year-end. Even when assuming Starry to aggressively utilize its equity line of credit, the company would have been required to raise additional capital in Q1 at the latest point due to an ownership blocker limiting availability under the facility at current share prices.

While the workforce reduction is expected to result in $48 million in annual cash operating expense savings, the company will incur approximately $3 million in related cash charges in the current quarter, mostly for severance payments.

But even when assuming quarterly cash usage to be cut in half going forward, the company would still require almost $100 million in additional funding just to make it to the end of next year.

At the current annual revenue run rate of $30 million, Starry is far from being a viable business and with the focus now on “penetrating its deployed network and deployed buildings“, meaningful growth will be much more difficult to achieve.

Even worse, the company is carrying a material amount of high-yield debt. At the end of Q2, $224.5 million were understanding under its senior secured credit facility which accrues paid-in-kind interest of approximately $6 million per quarter.

Under the terms of the facility, Starry needs to maintain a minimum cash balance of $15 million at all times.

In addition, there’s a covenant requiring the company to report annual results without a “going concern” or like qualification.

Please note that on the Q2 conference call in August, management remained optimistic about addressing the company’s near-term funding requirements:

(…) we are in advanced discussions with multiple parties about potential additional investment. I can’t go into specifics now but — and I caution that nothing is yet complete and may not ultimately occur, but I look forward to reaching agreement in the short-term that can provide us the capital to get to breakeven.

Ultimately on this topic, I’m extremely confident on our model — in our model and our differentiated economics in the customer demand for our product and our strong record of sustained successful execution. History has shown that good companies find funding support in even difficult times in my opinion with a great company and expect to resolve this funding gap shortly stay-tuned.

Clearly, things haven’t played out as expected by management at that time, otherwise there would have been no need for Thursday’s aggressive capital preservation efforts.

Given the current macroeconomic environment and weak capital market conditions, it’s difficult to envision Starry securing the funding required to stay afloat.

Moreover, even with the stock trading near all-time lows, the company’s enterprise value still calculates to well above $400 million which looks incredibly high for Starry’s $30 million annual revenue run rate.

Bottom Line

After just seven months as a publicly-listed entity, at least in my opinion, Starry appears to be headed for bankruptcy in the not-too distant future as the current market environment has resulted in the company running out of funding options.

Given the ugly combination of still elevated valuation and unviable business model, an acquisition of the company looks highly unlikely.

At this point, I would expect Starry to file for bankruptcy within the next three to six months and secured creditors emerging as the new owners of the business.

With at least $230 million in secured debt ranking firmly ahead of common equity holders, I would not expect any kind of recovery for Starry’s shareholders.

Given the issues discussed above, investors should consider selling existing positions and moving on.

Even a short bet could yield decent results for speculative investors despite somewhat elevated borrowing rates. At the time of this writing, Interactive Brokers had almost 800,000 shares available for borrowing at a rate of slightly above 20%.

As always, don’t bet the farm on short positions and adequately manage your risk.

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