With the scandals and ongoing lawsuits against Harvey Weinstein, the Chapter 11 bankruptcy filing of the Weinstein Co. comes as no surprise. A deal to sell the company for $500 million to Ron Burkle and partners fell through after the discovery of undisclosed debt.
Setting out to receive “stalking horse” bids, many bidders have begun to place their bids on the table. Potential investors often bid on and buy listed assets of a debtor before or currently in Chapter 11 bankruptcy. What is a stalking horse bid? How does a stalking horse bid work? This post covers that and much more.
The term “stalking horse” comes from an old hunter’s term from when hunters would hide behind their horses as they crept as closer to their prey. It loosely implies the possible buyer’s deal is hidden from the courts, creditors, and public, although this is not always the case.
Companies in a financial crisis and preparing to file business bankruptcy can accomplish an effective restructuring of their financial affairs with the sale of at least the majority of their company’s assets. A stalking horse bid is an initial bid on a debtor’s assets, such as the bids given for the Weinstein Co., ahead of a formal auction.
The highest initial bid becomes the floor price of the auction, giving way for the company to make more money from higher bids at the auction. This gives them the opportunity to refuse lower bids while having the advantage of the stalking horse bid, which acts as the bid that has precedence over the others.
How does a stalking horse bid work in regards to the bidding rules and procedure? For any company to participate, they must be able to give solid proof of their financial standings and deliver a good faith deposit. Prior to the auction, other bidders will have to follow the same guidelines. This may place the stalking horse bidder in a position of control of the following.
It would be to the benefit of the stalking horse bidder to negotiate bidding procedures in their favor. For example, the company could establish steep bidding increments when the auction begins in an effort to deter opposing bids or they could obtain matching rights to reduce its own expense to remain in the auction.
How does a stalking horse bid work in favor of the bidder? There are numerous incentives for the bidder. For starters, the selected company is chosen to place the initial bid by the distressed company. Secondly, when a bidder decides to place a bid, they usually have the opportunity to conduct an internal review of the company’s assets. Other bidders may not have enough time to do their due diligence to inspect the same assets.
Another advantage is the stalking horse bidders can partake in discussions with important vendors, customers, and landlords prior to any bidding in an effort to become better acquainted. This allows them to be in an advantageous position to form a deal with the company in bankruptcy. This extends to outstanding liens, current contracts, and other specific assets owned by the struggling company.
Expenses incurred by the stalking horse bidder for financial advisers, legal fees, and other deal-related expenses are typically reimbursed if the company is outbid. This is obviously contingent on if the fees exceed the debtor’s estate. The expenses must be included as administrative fees to qualify.
Break-up fees are a type of protection given to stalking horse bidders should they be outbid during the auction. The negotiated fee often ranges from one to three percent of the final purchase price to aid in the compensation of a portion of the losses. The break-up fee is subject to court approval.
There are a few cons when being the initial bidder. Even though the stalking horse bidder wishes to attain the assets at the lowest price, the price must be within reason. Additionally, the negotiated bid between the company in debt and the bidder is not always guaranteed if not approved by the bankruptcy court or creditors committee.
Also, by setting the initial bid, there is the risk of the assets not being as valuable as the indicated floor price or the company’s assets deteriorating throughout the auction process. Without additional bidders, the stalking horse bidder may believe they overbid. Finally, success is not always promised. The stalking horse may be outbid at the auction or no other bidders may show.
How does a stalking horse bid work in the event of no additional bidders in an auction? If there aren’t any other bidders, the company that submitted the stalking horse bid will be awarded the assets of the troubled company at the pre-negotiated price. There’s always a chance other possible bidders see the bid and decide to forego bidding altogether for a different opportunity.
Even still, some bidders may avoid making the initial bid as the stalking horse. They might choose to wait for another to make the move, only to participate in the auction after the floor price has been established.
Business bankruptcy filings happen more often than one would think and can be beneficial for struggling corporations. By placing an initial bid as the stalking horse bidder, it gives the bidder a chance to negotiate a tentative purchase agreement with the struggling debtor.
The process of a stalking horse bid initially may seem confusing. Our recommendation is to work with legal and financial specialists to help you navigate the procedure as a potential purchaser or struggling business preparing to file bankruptcy. It is vital to work with professionals to negotiate and close the deal as rapidly and efficiently as possible.