Case Study for Sell-side Techniques to Use in an Asset Sale with Multiple Bidders
Written by Kenneth Mann

This case study discusses Wellington Leisure Products Inc. (WLP) (seller), a consumer products manufacturer with diverse product lines: cordage (rope), both commercial and retail; PDFs - life vests; pool toys; patio furniture (wood furniture, umbrellas, and replacement cushions); and hunting products (deer hunting scents/lures). The seller was operating in chapter 11, run by a turnaround manager who was brought in after fraud was alleged. The seller had no secured debt, and about $65 million in unsecured debt, about $40 million of which was with banks. Annual sales were about $120 million. Equity Partners (EPI) was retained by the debtor to sell various divisions, including the cordage division. The banks, which made up most of the unsecured creditors’ committee, were willing to give us about 90 days to sell the business as a going concern before pulling the plug. They were funding significant losses and due to seasonality, the losses would get much worse about 120 days out.

Typically, with multiple bidders, we invite prospects to bid by a certain date if they wish to be considered for the stalking-horse position. Once the bids are received, we will pick the best offer, negotiate some improvements, and file a motion seeking approval of that bid, subject to overbidding. In this case, things went a bit differently.

We were able to get close to 200 companies to sign confidentiality agreements and take a look at information books on the deal. We set a loose deadline of 60 days by which interested parties had to make their offers. At 60 days, we had seven letters of intent for the business, six of which were accompanied by deposits of $200,000 each.

Choosing the right stalking horse was very important to this deal, for a variety of reasons. For example, one of the bidders was a very large competitor that produces off-shore. In the eyes of the 1,000 employees, this competitor as a buyer or stalking horse meant the exodus of their jobs to Mexico and China. The potential flight of employees threatened to severely diminish the value of the business. Furthermore, most of the bidders felt they couldn’t compete with this “thousand pound gorilla,” and making them the stalking horse would likely scare off other buyers. Also, customers would be unhappy with the near monopoly caused by the merging of these two entities, and could potentially begin to move business. Of course, it is possible that the competitor could have mooted its need to buy WLP simply by driving it out of business by “pretending” to buy it!

Because we had more than one backup bidder and we knew there would be lively bidding, we were not overly concerned with the purchase price in the stalking-horse bid. We felt we were already fairly close to the real value of the assets. We were more concerned with having a “sure thing,” with favorable terms and free from onerous terms or bidding procedures that could chill the bidding, with little to no “outs”, and one that the employees and the marketplace would look at as a favorable outcome. We couldn’t afford to waste time getting a buyer approved, and then have it fail to close because by then the business could be dead, and worth much less. Several of the highest bidders threatened not to participate in the auction unless they were chosen as the stalking horse, and they were seeking aggressive stalking-horse fees and overbid protection clauses.

This led to an informal “auction before the auction” through which we told the bidders they were competing for the stalking-horse position. We told them that we would only choose a stalking horse when one of them would sign an asset purchase agreement that had no “outs,” that contained certain favorable terms including a consignment agreement (on the portion of inventory not being purchased at closing) and that was accompanied by a $500,000 deposit (refundable only if they were outbid or a sale was not approved). We told them while certainty was the main thing we sought, we’d also be looking to see who paid the most for the inventory, and who bought the most inventory for cash at closing (versus consignment). Lastly, we told them we were seeking reasonable minimum overbids and break-up fees. This resulted in two bidders pushing to be the stalking horse and improving their offers and terms. It is important to note, that at this stage, we couldn’t make any guarantees regarding bid procedures, break-up fees or minimum overbids; we could only say we’d support them subject to court approval. We chose our stalking horse, but then switched to another bidder when the first bidder failed to sign an asset purchase agreement quickly.

With a firm offer, a clean asset purchase agreement, a reasonable break-up fee and minimum overbid, and a $500,000 deposit, a motion was filed, seeking approval of bidding procedures and the purchase agreement, and, ultimately, approval of a sale to this bidder, or subsequent higher bidder. It’s also important to note that the motion allowed for the approval of a “backup bidder”, with whom the seller would be authorized to close, if the winning bidder failed to do so. The motion requested shortened notice on the bid procedures hearing, and so there were two hearings: one to approve procedures, and after the “auction,” one to approve the sale.

Four bidders chose to continue on in the process and qualified to conduct due diligence by posting $500,000 each. Ultimately, at the auction, we had two bidders. On that last day, over the course of 46 bids, the price went from $10.3 million in cash at closing for equipment and inventory, plus other consideration for leases, consigned inventory, etc., to $15.15 million plus other consideration. This price was far beyond the expectations of the unsecured creditors’ committee. The sale was approved on the following day, and closed shortly thereafter.

Some important lessons that were reinforced by the facts of this case:

1.) If you have multiple interested parties, the price will take care of itself and it is more important to get certainty, and to get the sale motion filed before the business crashes. Don’t be afraid to file a sale motion just because you don’t like the current pricing. Don’t waste too much time negotiating price increases. Get to the auction before the business suffers further damage. The competition will get the price where it needs to be.

2.) Lots of bidders will tell you they are “out, unless….”. Sometimes they are bluffing! If they love the deal, and there are logical reasons for them to buy, it’s not as easy to scare them off as you might think.

3.) Minimum overbid and break-up fee requirements can be very helpful tools to encourage prospects to bid, and also to give the bidders something to compete for as a way to increase prices before the auction. It is important, however, to keep these at reasonable numbers so as to avoid chilling the bidding. Two percent break-up fees and 5 percent minimum overbids are the norm and generally work well, but may not be enough in smaller deals.

4.) Pick your stalking horse wisely. It can be dangerous to pick a strategic buyer as a stalking horse in a case where there are multiple financial buyers. Chances are, the strategic buyer will stay in the game either way, whereas financial buyers are more likely to drop out if they are bidding against strategic bidders without some way to recoup their due diligence costs. On the other hand, the strategics are generally less likely to fall out of bed, and so, bring greater certainty.

Ken Mann
Equity Partners, Inc.
Ph: 410-822-0216 Fx: 410-822-0217
mann@equitypartnersinc.com

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