B. Riley Financial continues efforts to mitigate the aftermath of its former ties with Franchise Group Inc. – which filed for bankruptcy in November after about a year in turmoil – resulting in an investigation by the Securities and Exchange Commission and a subsequent stock plummet for B. Riley back in August.
In a deal that recently closed, the Sawtelle-based financial services firm sold the majority of its Great American Group business unit to Brentwood-based Oaktree Capital Management for $203 million in cash as well as stock in the newly independent GA Group. B. Riley estimates a $235 million gain on its investment in Great American, which is headquartered in Woodland Hills, for the fourth quarter of the year.
Bryant Riley, chair and co-chief executive of B. Riley, said this deal “provided B. Riley with the ability to meaningfully de-lever our balance sheet and retain significant equity upside in a business with compelling growth prospects” in a statement.
The need for cash stems from a deal gone wrong with Franchise Group, which owns Vitamin Shoppe and Sylvan Learning, and its former Chief Executive Brian Kahn, who Riley has known professionally for decades.
B. Riley helped take Franchise Group private in August of 2023, providing $600 million in debt financing, and also made a $201 million loan to Vintage Capital Management, a Florida-based investment fund started by Kahn which had a stake in Franchise.
The 2020 failure of a hedge fund connected to Kahn – Prophet Asset Management – sparked ethical concerns surrounding Kahn when a formerly sealed lawsuit came to light.
The suit alleged that Kahn controlled 86% of the hedge fund’s assets and used a lot of that money to buy shares in Franchise Group, the Los Angeles Times reported. Separately, last year the fund’s co-founder, John Hughes, plead guilty to conspiracy to commit securities fraud, however, Kahn has not been charged.
Nevertheless, Kahn resigned as chief executive of Franchise Group in January.
In August, B. Riley disclosed that it was under investigation by the SEC related to its dealings with Kahn and announced a $330 to $370 markdown of its loans to Franchise and Vintage.
Addressing losses
At the end of October, B. Riley closed another sale of the brand assets from its subsidiary, Bebe Stores Inc., securing about $236 million in cash for the firm.
This will go toward paying down outstanding debt and deleveraging B. Riley’s balance sheet.
This sale, along with the Great American deal, signifies “moving from a period of asset monetization to a renewed focus on growth in our core financial services operating businesses,” Riley said.
“There remains a huge opportunity in the small- and mid-cap markets, and we believe B. Riley is uniquely positioned to meet this demand,” he added. “We look forward to providing investors with an update on our plans on our next quarterly earnings call.”
In another move, B. Riley entered into an agreement to sell part of its wealth management business in November to Stifel Financial Corp., a wealth management and investment banking firm headquartered in St. Louis, in a transaction expected to close in the second quarter of 2025.
Depending on the number of advisers that join Stifel when the deal closes, B. Riley can expect to see between $27 million and $37 million in cash. The accounts that move will bring $3.5 billion to $4.5 billion in assets under management.
Riley said those who leave will find “a great home at Stifel” and that their day-to-day responsibilities will not be affected.
“The past year has proved disruptive to our (wealth management) business, with competitors taking advantage of the noise surrounding our principal investments business,” Riley said in a statement. “We decided to take a proactive approach for those who wanted a fresh start and found a well-respected partner in Stifel.”
While the firm will be focusing primarily on its middle market financial services business, it will continue operating a reduced wealth management business.
In mid-November, B. Riley announced it would be delaying its third quarter earnings report but released some preliminary updates. Among those included an expected net loss of between $130 million and $135 million, attributing this mostly to a $120 million decline in its retail investment valuation. Additionally, the firm reported $159 million in cash and more than $2 billion in debt.
