Jamba Juice Buys Some Time

Jamba's Preferred Placement Buys Time

Jamba Inc. (JMBA - Snapshot Report) just bought time to execute its turnaround strategy. The smoothie chain announced today that it completed a previously announced sale of $35 million in convertible preferred stock.

Proceeds from the preferred stock -- which yields 8.0% and is convertible into common at $1.15 per share – will be used to repay Jamba's very costly $25 million two-year note that matures in September 2010.

Assuming the preferred stock is not immediately converted, Jamba's quarterly interest expense will decline to $0.7 million in 3Q09 from $1.75 million in 1Q09.

The funding was led by Mistral Equity Partners, a private equity fund, and by the Serruya family, Canadian entrepreneurs.

Last year, the cash-strapped juice purveyor was forced to pay exorbitant rates for funding after tumbling sales and EBITDA precluded use of its former bank facility. The current note to be repaid carries an interest rate equal to 6-month LIBOR plus 8%, with a floor of 12.5% and a $375K make-whole payment due when Jamba repay early. Jamba also issued the lender 2 million shares of stock, with a put/call agreement that essentially values the shares at $3 million.

Jamba is suffering from the effects of uncontrolled growth that has led to under-performing locations being opened and a loss of attention to innovation. Although management has formulated a turnaround plan that includes innovating healthier menu offerings and adding breakfast food, it would take a long time for new day-parts -- such as breakfast or lunch -- to become meaningful contributors as they have at Starbucks (SBUX - Snapshot Report), and beverage sales alone cannot support the stores.

The new $35 million, lower-interest cash infusion should buy it some time, but not much, as consumers cut spending and cash flow falls.

Shares of Jamba jumped 16.2% to $1.36 today, and now trade 62% off their 52-week high, equating to an EV/2010 estimated sales of 0.4x. We are maintaining our Hold rating.