An earlier version of this article said Blue Apron had $30 million of debt. It had repaid $15 million as of March 31, leaving just $15 million remaining. The article has been corrected.
Blue Apron Inc.’s stock soared 20% Tuesday, after the meal-kit provider announced a deal that is expected to ease funding pressures.
The New York-based company
APRN,
said it plans to shift to an asset-light model by transferring infrastructure technology to FreshRealm, a provider of fresh meals to retailers across the U.S.
The companies have signed a nonbinding letter of intent for the transfer, with Blue Apron to receive up to $50 million and FreshRealm to get warrants in an amount equal to 19.9% of the company’s then-outstanding common stock at an exercise price of 1 cent a share.
Blue Apron does not expect any change to its revenue streams, but will focus on further growing the brand and striving for still-elusive profitability.
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“As we continue to evolve, we believe there is an opportunity to simplify our direct role in the fulfillment of our product, allowing us to focus on growing our brand, our customer base and revenue in the long-term,” said Chief Executive Linda Findley in a statement.
The deal is expected to close on or about June 9.
Benchmark analyst Daniel L. Kurnos said he expects the deal to “substantially” accelerate the company’s path to profitability.
“We suspect the relatively muted share reaction reflects past funding difficulties and the concept that the deal centers on a non-binding LOI, but we believe the two funding scenarios are vastly different (the second still remains in play with held collateral by Apron), with this deal being significantly more commercial in nature with an existing partner who is looking to scale their own B2B operations (no direct competition),” Kurnos wrote in a note to clients.
Benchmark has a buy rating on Blue Apron stock and a $5 price target, well above its current price of 55 cents.
Blue Apron may need some bridge funding to create a cushion in a downside economic environment, but Kurnos is confident it could survive from here without any additional funding from capital markets.
“Furthermore, we believe the deal has significant scale benefits
over time while also opening the door to incremental revenue opportunities as FreshRealm brings their own equipment for other services into play at the former Apron facilities,” the analyst wrote.
“We think the risk/reward from here looks extremely compelling,
with a much higher probability now of a positive outcome.”
See also: Blue Apron to launch weekend Brunch Box this spring
FreshRealm already makes Blue Apron’s “heat & eat” meals. Its Chief Executive Michael Lippold said the meal industry is best positioned for profitability “through organizations staying within their core competencies.”
“This announcement positions Blue Apron to focus on the customer experience; while FreshRealm continues on the path to be the leading platform to support retailers across multiple channels with a broad and efficient solutions offering,” he said.
The news is expected to eliminate default risk that has weighed on Blue Apron, which has been in business since 2012 but has yet to make a profit.
But its first-quarter earnings released in early May showed revenue of $113 million to top the $107 million consensus, driven by stronger net customer growth.
The company acknowledged on its earnings call that it was facing a funding deadline around mid-June and that it was focused on reducing cash burn. By quarter-end, its cash burn was down by about $19 million from the year-earlier period, for a 64% year-over-year reduction.
But the company also said it had amended a note purchase agreement that required the accelerated paydown of a then $30 million debt due in four installments. By end-March it had repaid $15 million with the remaining two payments due by May 15 and June 15.
Blue Apron stock is down 34% in the year to date through Monday’s close, while the S&P 500 index
SPX,
has gained 7.7%.
