This blog was originally published on July 21, 2015. It was updated on March 22, 2021.
Bankruptcy Sales: What Is a Stalking-Horse Bid?
A stalking horse bid, in the Canadian insolvency context, is an attempt by a company (and/or its Monitor, Receiver or Trustee ) in a Court supervised insolvency proceeding, to set what will be the baseline that must be met and beaten by any other bids for the assets. The intent is to maximize the value of its assets as part of a Court supervised sales process and to discourage any bid below a certain value.
A stalking horse is a process that allows a potential buyer (the stalking horse bidder) to make a public bid for a company’s assets in order to set a floor price for the amount of money to be received by the company’s creditors in a (bankruptcy) sale. The stalking horse bidder will get to purchase the company’s assets if no other bidder comes forward. The stalking horse provision allows for the bidding process terms and conditions to be set in a court-supervised sale.
In this Brandon Blog, I describe the stalking horse bid process and how it works
What’s a stalking horse bid? Example of a stalking horse bid
According to Wikipedia:
“The term stalking horse originally derived from the practice of hunting, particularly of wildfowl. Hunters noticed that many birds would flee immediately on the approach of humans, but would tolerate the close presence of animals such as horses and cattle. Hunters would therefore slowly approach their quarry by walking alongside their horses, keeping their upper bodies out of sight until the flock was within firing range. Animals trained for this purpose were called stalking horses.”
In an insolvency context, a stalking horse bid stands to test the market to see how the market values the assets for sale. If the market values the assets less than the amount of the stalking horse bid, then no one will bid higher and the party who made the stalking horse bid will be successful in acquiring the assets.
If the market values the assets more than the amount of the stalking horse bid, the higher offers will be made for the assets and for the Court to consider for approval. Presumably, a higher offer will be approved, the purchaser will purchase the assets and the stalking horse bid will not prevail.
How a Stalking-Horse Bid Works
The stalking-horse bid method allows a distressed company to avoid receiving low ball bids as its assets are being sold. Once the stalking-horse bidder has made its offer and it has been negotiated and court-approved, other potential buyers may submit competing bids for the company’s assets.
By setting the low end of the bidding range, the insolvent company hopes to realize a higher price on its assets. Insolvency proceedings are public. The public nature allows for the disclosure of more information about the deal and the buyer than what would be available in a private deal.
Stalking-horse bidders can generally negotiate which particular assets and liabilities it hopes to acquire. After the stalking horse bid is negotiated resulting in an asset purchase agreement, it will be necessary for the company, Receiver or Trustee to obtain Court approval of not only the stalking horse bid but also for the entire sales process to be implemented.
If the company is attempting to restructure and requires “bankruptcy protection”, then those corporate proceedings would be either under the Companies’ Creditors Arrangement Act (“CCAA”) or the Proposal provisions of the Bankruptcy and Insolvency Act (Canada) (the “BIA”). In that situation, it is the company making an application to the Court with the support and assistance of the monitor or proposal trustee.
If it is a corporate receivership or bankruptcy proceeding, then it is either the receiver or bankruptcy trustee making the application. In the case of bankrupt corporations, then it is the bankruptcy court that needs to approve the stalking horse bid, the entire sales process and approve the sale.
What does it take to get bankruptcy court approval?
When applying to the Court, approval for an entire sales process is being sought, a component of which is the stalking horse agreement. The Court has various considerations in determining if a stalking horse sale process should be approved. They are:
- Is a sale transaction warranted at this time?
- Will the sale benefit the whole “economic community”?
- Do any of the debtors’ creditors have a bona fide reason to object to a sale process of the business?
- Is there a better viable alternative?”
In the event the stalking horse bid is not the successful winner because of the other potential bidders at least one made a better offer, it is normal for the stalking horse purchaser to receive some form of compensation. The compensation is for the time, cost and resources invested to perform its due diligence, to make its offer which was found to be reasonable in the circumstances and to expose that offer to the marketplace to stand as a stalking horse bid, and for that bidder to not end up as the successful purchaser.
Our Firm has been involved in situations where the stalking horse bid has been both the successful bid unsuccessful bid. If the compensation, commonly known as break-up fees, is fair and reasonable, it will not dissuade other purchasers from coming forward in the sales process, and it will also be fair to the stalking horse bidder if they are unsuccessful. It is fair to the stalking horse bidder to have these bid protections incorporated into their offer.
The Court in considering the approval of a stalking horse bid also considers if the breakup fee, and the entire stalking horse bid, has been negotiated between arms’-length parties and has the support of the stakeholders involved in the insolvency proceeding.
The Pros and Cons of Being A Stalking Horse Bidder for Assets In Bankruptcy
There are various pros and cons to being a stalking horse bidder and making the stalking horse bid. First the advantages:
- First to tie up the company’s management, perform due diligence thereby dealing exclusively with the company for the proposed purchase of its assets.
- Gaining the advantage of time and access to the company’s financial information.
- Having the time to be able to understand the company’s problems and challenges.
- Getting under contract for the assets the purchaser wants to acquire.
The cons of making the stalking horse bid are:
- Making sure that you set the break fee high enough to fully compensate the stalking horse bidder.
- Not having too long a time period between approval of the stalking horse bid and the time when other bids must be submitted to avoid the assets or the company’s operations worsening through the process.
- Would it have been better not to have been the stalking horse bidder and see how the company and its assets fare before having to submit a bid?
- If the stalking horse bidder is not a secured lender, is there a likelihood the secured lenders will bid their security which will outbid yours?
- If there is more than one acceptable bid, then an auction process is required to determine the successful bidder. The stalking horse bidder may not wish to participate in such an auction and will end up losing out.
Can a secured creditor credit bid? Cirque du Soleil agrees to ‘stalking horse’ takeover bid from lenders worth $375M
One of the most recent high-profile successful stalking horse bids was the Cirque du Soleil insolvency proceeding under the CCAA. In that case, a takeover proposal from the Cirque du Soleil’s secured creditors has been approved as the benchmark bid for a court-supervised auction of the insolvent entertainment company.
That is called a credit bid. When the secured creditor bids all or a portion of its outstanding loan. This will be done in situations where the secured creditor believes that the value of the assets to be sold is less than the amount owed, yet the company’s assets can be used to run a viable business. In that situation, the secured creditor would rather bid its security with the company debt to take over the assets.
By making a credit bid, the secured creditor potential purchaser does not need to come up with cash for the purchase price. However, cash will be required to make certain payments to parties the company business cannot operate without and to have working capital going forward.
If they bid the full amount of their loan and get outbid in other purchase agreements, it means they get fully paid out. Otherwise, they get the assets to run the company, bring it back to financial good health and profitability. Eventually, then they will sell the healthy company to recoup their money plus make a profit.
Stalking horse bid summary
If your company is experiencing financial difficulties, don’t waste your time stalking horses or any other animal. Seek the advice of your professional advisers. The earlier you seek financial help the more options will be open to you. Contact Ira Smith Trustee & Receiver Inc. today. We’ll review your corporate issues and come up with a sound plan so that Starting Over, Starting Now you can enjoy financial peace of mind.
