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Redback Investors Flee Restructuring

Redback Networks Inc.'s (Nasdaq: RBAK) restructuring plan aims to give its balance sheet a nip and a tuck, wiping out debts and dodging bankruptcy. The only problem is that remaining common shareholders could see most of their equity value nipped away as well.

The company announced this week it has entered into a lockup agreement with its debt holders that provides for a $467 million debt-for-equity swap, whereby Redback's debt holders will get an equity stake in the company in exchange for cancellation of the debt (see Redback Cuts Debt, Wins Reprieve).

If all of Redback's debt is exchanged, the debt holders will get about 95 percent of Redback's issued and outstanding common stock, the company says. The remaining 5 percent of the company's stock will stay with existing stockholders, who will get the right to increase their ownership through the issuance of two sets of seven-year warrants.

To keep its stock price from falling below listing standards while all this is happening, Redback will seek to execute a reverse split, where it reduces the number of outstanding shares and increases the value of each share .

Existing Redback shareholders will have their stake in the company diluted significantly, but it's hard to say how much, because Redback hasn't said how many shares of its stock will be outstanding after the deal goes through.

So far, Wall Street has been shooting first and asking questions later. The stock has lost half its value in the last two days. Today the stock tumbled six cents (12%) to $0.44.

Redback still has to get regulatory approval, as well as approval from all its existing shareholders by the end of September. If the plan hits a snag between now and then, the company will have to file for Chapter 11 bankruptcy protection, according to its SEC filings.

As the July 4 holiday weekend began, Redback sheepishly announced that its revenues for its second quarter would only be $22 million, far shy of the $30.7 million analysts were expecting, according to Thomson First Call (see Redback Sneaks Out Gloomy Forecast). The company lost 16 cents a share on revenues of about $40 million during the second quarter of 2002.

During a conference call Monday, Redback managers said the company should have about $69 million in cash at the end of the second quarter. They also acknowledged the company's revenue shortfall, blaming SARS and slow-moving customers in the U.S. for delayed orders [ed. note: no mention of El Niño?].

Redback will report its second-quarter results in detail on July 16.

— Phil Harvey, Senior Editor, Light Reading

reoptic 12/4/2012 | 11:47:18 PM
re: Redback Investors Flee Restructuring One fine messy situation they have to get the debtholders all on board, and the stock holders. Let's not forget all those real estate debts too. How likely is it that everyone agrees to this...if not it is chapter 11. What kind of customers are going to hang on for the ride? And Verizon seems to have their heart set on Juniper now. Maybe everything will break in their favor and they will emerge from this unscathed. Maybe it is time to flee the sinking ship!
Abby 12/4/2012 | 11:47:14 PM
re: Redback Investors Flee Restructuring Maybe it is time to flee the sinking ship!

Oh Boy, let's not go down that path. Should Redback belly up, we can all expect an extended downturn in the industry!

Why? Because CAPEX spending for over 500 service providers will be impacted.

Think about it, with the little money Service Providers have to spend these days, the last thing they want to do is displace the Redback SMS infrastructure in their networks. Furthermore, not only is there no real substitute that can match the feature rich capabilities of the SMS, displacing it will eat into every telecom equipment provider's pocket. For instance, instead of building out their core networks with those high margin core routers, service providers could end up spending those dollars on lower margin edge routers to replace SMSs. Sorry Juniper and Cisco. Or just maybe, instead of building out DWDM optical networks, they will just stick with good old SONET. And, let's not forget, they may just decide to limit their spending on building out wireless data networks, VOIP, or metro ethernet. Besides, who needs MPLS anyways? Frame Relay has been doing one hell of a good job so far.

Whatever they decide, its going to take money to displace Redback and that money they may have spent with your company.

Therefore, I think the industry should support Redback and save the ass-kicking for another day!
garibaldi 12/4/2012 | 11:47:13 PM
re: Redback Investors Flee Restructuring It's not unlikely that Nokia takes over the company in the end
BobbyMax 12/4/2012 | 11:47:13 PM
re: Redback Investors Flee Restructuring With Redaback's share trading at $ 0.41 per share, there is no place for it to go. Nobody would buy Redback, so the only wat for reback is to close down. The longer the company exists in business, the less chance it has to pay off the creditors.
optical_man 12/4/2012 | 11:47:13 PM
re: Redback Investors Flee Restructuring Ex-Bay Networks folks named their startup (during the bubbly bubble) after their favorite exotic Australian beer, Redback.

Clue 1: Bay Networks
Clue 2: Beer (see clue 1 for redunancy)

I know what the endgame is.

You tell me if that was a solid beginning. (or should have been a clue to the drunken VC's in 199X who wrote the initial checks)
gea 12/4/2012 | 11:47:11 PM
re: Redback Investors Flee Restructuring BobbyMax:

All your base are belong to us.
verstand 12/4/2012 | 11:47:04 PM
re: Redback Investors Flee Restructuring It's not unlikely that Nokia takes over the company in the end.
__________________________________________________

Will you explain why Nokia may take over Redback? and at what price tag? What do you think the price could be before and after the could-be Chapter 11?
Westcap 12/4/2012 | 11:45:24 PM
re: Redback Investors Flee Restructuring As a RBAK bondholder, I'd be interested in hearing why NOK would take over the company (other than the fact that they already own 10%). I hear they have been trying to obtain an edge router business for a while. Would they be interested in the SMS business as well? RBAK needs a strategic partner desperately and would be in dire straits if it loses its relationship with VZ to Unisphere/Juniper.
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