Professor Mike Lord Adds Perspective to Primo Water Credit Situation

3.30.2012 Article, Faculty News, General

Credit squeeze threatens Primo Water growth plan
Reposted from Triad Business Journal

Though still publicly focused on pushing ahead with what they hope will be their game-changing home soda appliance, Primo Water officials were working this week to head off a potential credit crunch that threatens to derail the firm’s growth.

Primo, which went public in 2010 on the strength of founder Billy Prim’s vision for a bottled-water tank exchange station in every store, faced a March 27 deadline to secure a commitment from a lender to refinance the company's $14.7 million line of credit. That credit agreement with Wells Fargo, Bank of America and BB&T matures on April 30 and is secured by "substantially all" of Primo’s assets, according to the company’s annual report filed with the SEC on March 15.

As of that report date Primo was still trying to line up its refinancing, and the company warned that if it couldn't, the lenders could declare the $14.7 million outstanding due immediately.

"If we are unable to refinance our Senior Revolving Credit Facility, we may be forced to reduce our capital expenditures and delay our growth plans," the report said. "If we were unable to repay the Senior Revolving Credit Facility when required, our lenders could commence legal action against us and foreclose on all of our assets to recover the amounts due."

Company officials did not respond to requests for comment, but Chief Financial Officer Mark Castaneda told analysts on a conference call that he had an "extremely high level of confidence" that Primo would be able to meet its borrowing needs, though probably at a higher cost for at least part of the capacity.

"We've got about $50 million in fixed assets and about $25 million in working capital — receivables and inventory," Castaneda said on the call. "That's what we'd be borrowing against."

No public announcements or securities filings were released related to the company's credit availability following the conference call prior to this article's deadline.

Doomsday scenarios are not uncommon in SEC filings, where companies are legally required to sketch out even the most remote risks for investors. Primo, in fact, is already facing a class action lawsuit from investors who have accused it of offering misleading projections of its financial condition and business operations, allegations the company has vigorously denied.

But Primo has been struggling to gain the momentum it had hoped for from its much-anticipated Flavorstation carbonated beverage appliance, which has been mostly disappointing so far because of production and distribution delays that caused it to miss much of the holiday selling season.

Primo’s shares, which had been trading above $15 before concerns about the Flavorstation launch set in, have plummeted, dipping below $2 per share this week.

Risk assessment
The lenders that Primo officials have been negotiating with have surely been studying the company's financials closely and considering how much risk extending new credit would involve, said Mike Lord, a strategy expert at the Wake Forest University Schools of Business.

The terms of the credit agreement have been amended several times and most recently were tightened dramatically, when the maturity date was moved up from November 2013 to the end of next month. The changes also reduced the total borrowing capacity allowed from $25 million down to the $14.7 million the company already owes.

"There are serious concerns about the ongoing operations of the business, so any additional lending is presumably going to have even stricter terms," Lord said. "They're lending to a company that people have a lot of questions about, so they’ll want to be No. 1 in line to get their money back first."

Primo officials, confident of their ability to line up the borrowing capacity they need, have focused on what they see as several positive trends that should benefit the firm.

Water sales, the company's primary business, increased by 46 percent between the fourth quarter of 2010 and the fourth quarter of 2011, to $13.9 million. Part of that growth came from buying into the vending-machine-based refill business in late 2010, but bottle exchange sales were also up 24.7 percent.

The company also sells water dispensers, and that business more than doubled to $6.4 million in the fourth quarter of 2011 versus a year earlier.

Sparkling prospects
CEO Billy Prim remains bullish on the Flavorstation soda machine, which he frequently likens to a razor and razorblades in terms of building repeat customers. Once the full line is introduced, customers will pay anywhere from $40 to $300 for the soda machine, and then continue to buy various flavorings and carbonation supplies.

The initial limited rollout of a single Flavorstation model in 500 Lowe’s Home Improvement stores will be followed with distribution this year, Prim said in the company’s latest earnings announcement, and a new strategic partnership with manufacturer Sparkling Drink Systems will allow for the expanded appliance lineup.

"We expect that these appliances and consumable products will positively impact our long-term growth prospects," Prim said.