Reversed Course

38

Bryant Riley founded his company with a single focus: research on small public companies ignored by big brokerages.

Things have changed. Now, 17 years later, his West L.A. brokerage, B. Riley & Co., is also an investment bank and a money manager.

And it will become a small public company itself.

B. Riley announced last week that it is buying Great American Group Inc. in Woodland Hills, a struggling public company that provides business and property appraisals as well as helps companies liquidate during bankruptcies.

It appears to be an odd purchase for a brokerage and investment bank. But Riley, chairman and founder of his namesake firm, said he is getting Great American for a good price, and he thinks the combination creates opportunities for B. Riley’s and Great American’s various business lines.

“We see how it all fits together,” he said.

Going public is a big step for Riley’s company, which he acknowledges he wouldn’t have taken without the Great American deal. He said his firm is too small on its own to go public the traditional way, through an initial public offering, hence a reverse merger with Great American.

Even combined, the new B. Riley will have a market cap of just about $80 million based on terms of the deal, making it smaller than 80 percent of companies on the LABJ Stock Index. But Riley said being public will help attract new investors and make it easier to give employees a stake in the company through stock options.

“It gives us great ability to compensate our people and get everyone to row together,” he said.

Business ties

B. Riley and Great American go back five years: The investment bank advised Great American on the 2009 deal that took it public in the first place, and Riley has been a director of the company since.

Great American had a huge year in 2009 as the failure of big retailers resulted in boom times for liquidation businesses. The company helped sell off the remains of chains such as Mervyn’s and Circuit City, leading to net income of nearly $17 million that year. The bankruptcy frenzy of that year was the justification for its initial public valuation of about $160 million.

But that proved to be a high-water mark. In 2010, Great American lost $11 million. It has been profitable in the years since, though it has never come close to 2009. Last year, the firm reported net income of just over $1 million.

Great American’s thinly traded shares were priced at 14 cents before the deal with B. Riley was announced, valuing the company at just $4.2 million.

But Riley said the firm is undervalued and that investors haven’t given it enough credit for its growing valuation and appraisal services. While revenue from Great American’s liquidation business has been falling, revenue from valuations has grown.

“They’ve done a good job of staying profitable,” he said. “The appraisal business has been growing meaningfully.”

The appraisal business is of particular interest to him as he believes it will lead to referrals for his firm’s investment banking practice, and vice versa.

“Great American often sees opportunities for a company that might be growing or in distress to raise equity or debt,” Riley said. “I think it’s all about those various touch points coming together.”

Mechanics

B. Riley has made acquisitions before, buying small Irvine investment bank Friendly & Co. in 2004 and San Diego brokerage firm Caris & Co. in 2012.

But the Great American deal, announced May 19, is bigger and more complicated than those purchases.

To start, B. Riley and Great American will combine through a reverse merger, with Great American giving tens of millions of new shares to B. Riley shareholders. Most will go to Riley, with a smaller percentage going Tom Kelleher, B. Riley’s chief executive.

Next, institutional investors, along with B. Riley and Great American employees and executives, will buy $51.4 million worth of stock in the newly combined company. Most of that money will be used to pay off debt Great American owes to its chief executive, Andrew Gumaer, and president, Harvey Yellen.

Servicing that debt has been costing Great American more than $2 million a year, a drag on profits. Great American executives could not be reached for comment for this article.

Finally, the company will do a reverse stock split, combining 20 shares into one – with the goal of raising the stock price so it meets rules for listing on the Nasdaq exchange. Great American now trades over the counter. Shares closed at 35 cents Wednesday, up more than double since before the deal was announced. At that price, shares would trade for $7 after the reverse split.

Once the deal is closed, new investors will own 64 percent of the company, current Great American shareholders will own about 9 percent, Riley will own 23 percent and Kelleher the rest.

Riley owned nearly 90 percent of B. Riley, giving him control. Even though he will not have control of the new entity, he said this is a good deal for him because the combination should make his firm more valuable.

One potential downside of the deal is that B. Riley, which has always been private, will have to report its numbers each quarter and answer to institutional investors.

Riley said it will be a big change, but he’s confident.

“When you’re public, it’s out there and exposed,” he said. “But when you’re responsive and responsible, that’s something that’s just part of the deal.”