{"id":9750,"date":"2020-09-21T20:00:57","date_gmt":"2020-09-22T00:00:57","guid":{"rendered":"http:\/\/www.irasmithinc.com\/blog\/?p=9750"},"modified":"2021-11-23T10:04:58","modified_gmt":"2021-11-23T15:04:58","slug":"stalking-horse","status":"publish","type":"post","link":"https:\/\/irasmithinc.com\/blog\/stalking-horse\/","title":{"rendered":"STALKING HORSE INSOLVENCY PROCESS: OUR BEST GUIDE TO GET YOUR M&A DEAL DONE"},"content":{"rendered":"

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The<\/a>\u00a0Ira Smith Trustee Team<\/em><\/a>\u00a0is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.\u00a0\u00a0We hope that you and your family are safe and healthy.\u00a0\u00a0
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If you would like to listen to an audio version of this stalking horse<\/em> insolvency process Brandon’s Blog, please scroll to the bottom and click on the podcast.<\/strong><\/p>\n

Stalking horse<\/em>\u00a0introduction<\/strong><\/h2>\n

I have written before about a\u00a0stalking horse<\/strong><\/em>\u00a0in the insolvency context.\u00a0 Two things recently happened that suggested that I should write about it again, from a slightly different perspective.\u00a0 The first thing was that Ira Smith recently did a Zoom webinar presentation for the\u00a0M&A Club Canada<\/a>.\u00a0 The topic they wanted the webinar on and the title of the webinar was “Insolvency restructuring to get your M&A deal done”.\u00a0 Second, I see that there has been an increase in online searches for that term.<\/p>\n

So, the purpose of this Brandon’s Blog is to describe what a\u00a0stalking horse<\/a><\/em>\u00a0is and provide you with some insight as to how an insolvency process can be used to get an M&A deal done.<\/p>\n

What is a\u00a0stalking horse in the insolvency and M&A world<\/em>?<\/strong><\/h2>\n

In the distressed M&A context, a\u00a0stalking horse<\/em>\u00a0refers to a possible buyer participating in a stalking horse auction to purchase the assets of an insolvent debtor as a going concern. In a\u00a0stalking horse<\/em>\u00a0public auction of a financially troubled business, an initial bid by the\u00a0stalking horse<\/em>\u00a0bidder is divulged to the marketplace and becomes the minimum quote, or floor cost, that potential purchasers can then outbid.<\/p>\n

It was first extensively utilized in the USA and currently is a routine part of the Canadian insolvency landscape. The\u00a0stalking horse<\/em>\u00a0process is different than the sealed tender sale approach that is traditional in Canada. The\u00a0stalking horse<\/em>\u00a0sales process has been used in Canada many times. The case study that Ira presented in his webinar and gone over below, was one that the Ontario Superior Court of Justice approved.<\/p>\n

The\u00a0stalking horse<\/em>\u00a0participates in the process understanding that it might be outbid. Accordingly, it negotiates a break fee to cover its costs.\u00a0\u00a0This includes its due diligence costs to put together the first offer. Typically, for a competing bid to knock out the\u00a0stalking horse<\/em>\u00a0offer<\/a>, it will certainly have to be more than the\u00a0stalking horse<\/em>\u00a0bid plus the Break Fee (described below). The competing offer will certainly likewise need to be on the exact same terms as the\u00a0stalking horse<\/em>\u00a0bid, and cannot include any kind of burdensome conditions.<\/p>\n

Why would anyone want to become a\u00a0stalking horse<\/em>?<\/strong><\/h2>\n

So, why would someone want to be a\u00a0stalking horse<\/a><\/em>? Initially, as a\u00a0stalking horse<\/em>, you will certainly have the most effective opportunity of discussing the terms of a purchase that are customized to satisfy your specific issues. Also, as the first prospective buyer, you will have even more time to evaluate and comprehend the insolvent debtor’s company. You will also have a chance to develop connections with management, vendors, and key stakeholders in the sales process.\u00a0\u00a0This gives the\u00a0stalking horse<\/em>\u00a0bidder a leg up.<\/p>\n

Their expenses of participating in the sales procedure are covered by the break fee that you will negotiate. That break fee is generally secured by a unique court-ordered charge against the assets of the insolvent debtor.\u00a0\u00a0However, you will need to consider the ranking of this charge against other charges that may have been already granted by the court.<\/p>\n

How a\u00a0stalking horse<\/em>\u00a0bid works<\/strong><\/h2>\n

The\u00a0stalking horse<\/em>\u00a0method permits a distressed company to prevent receiving reduced proposals as it sells its assets. When the\u00a0stalking horse<\/a><\/em>\u00a0prospective buyer has made its deal, the court has accepted that quote and all other conditions of the court-supervised sale, other prospective purchasers may send contending bids for the company’s assets.<\/p>\n

By setting the low end of the bidding process, the insolvent firm wishes to realize a greater price, yet understands it cannot obtain a lower one. Insolvencies are public. The general public nature allows for the disclosure of even more information about the opportunity and the company\u00a0than what would certainly be available in a private deal. Because of this, in this case study, I explain below, I can mention some names.<\/p>\n

Stalking horse<\/em>\u00a0prospective buyers can typically bargain which specific assets it wishes to obtain. It likewise does not have to acquire any of the insolvent business’s liabilities.\u00a0\u00a0It may however choose for business reasons to take some on voluntarily. Examples would be amounts owing to critical suppliers or employment-related liabilities for employees of the insolvent company they may wish to retain.<\/p>\n

MPH Graphics\u00a0stalking horse<\/em>\u00a0bid process case study\u00a0<\/strong><\/h2>\n

MPH Graphics inc.<\/a>\u00a0(MPH) was an insolvent company.\u00a0 They had a potential purchaser who was willing to stand as a stalking horse bidder.\u00a0 We ran a successful stalking horse process in this case.\u00a0 This case happened quite a few years ago, but, since then, we have used the identical technique in other cases.\u00a0 When a similar kind of case comes up in the future, we would use the same process.\u00a0 So, although the case is older, the steps taken are still well suited today.<\/p>\n

MPH was a company that provided printing design and finishing for Canadian and US customers. MPH printed a variety of products such as business cards, direct mail pieces, annual reports, and marketing materials and primarily serviced government agencies, not for profit organizations, and unions.<\/p>\n

MPH grew by acquisitions and required additional capital equipment financed by debt. The business also had to change because the industry was changing from traditional printing presses to digital.\u00a0 That changeover required further capital investment.<\/p>\n

MPH was insolvent<\/strong><\/h2>\n

MPH’s line of business primarily serviced government agencies, not for profit organizations, and unions.\u00a0 Absorbing the acquisitions produced inefficiencies and redundancies.\u00a0\u00a0It also needed to move to larger premises which meant moving costs and higher ongoing rent costs were being incurred.<\/p>\n

At the same time, the industry was extremely pricing competitive.\u00a0 Gross margins were squeezed. Overhead costs, especially sales salaries and entertainment expenses increased. There was now a history of losses. The technical staff was very experienced.\u00a0 To get the union business, MPH’s technical side had to be a union shop. MPH had a blue-chip client list, which is what was really of interest to the\u00a0stalking horse<\/em>\u00a0bidder.<\/p>\n

Receivable collections were slowing down and the bookkeeper had to put payable cheques that were printed every month in a drawer.\u00a0 The cheques could not be released because there was not enough money to pay their liabilities as they become due.<\/p>\n

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The\u00a0stalking horse<\/em>\u00a0bidder came knocking<\/strong><\/h2>\n

The bidder was an industry consolidator.\u00a0 They came knocking to try to buy the MPH assets.\u00a0 The consolidator did its due diligence and issued a non-binding letter of interest.\u00a0 After further discussions, that interest turned into a binding agreement to purchase the assets.\u00a0 One of the terms of the deal was that the\u00a0stalking horse<\/em>\u00a0bidder<\/a>\u00a0required court approval<\/a> of the purchase and a vesting order from the court to vest the assets out of MPH into the acquiring corporation.<\/p>\n

Notwithstanding there were tax losses, the purchaser did not want to purchase shares and have to deal with all the creditor issues.\u00a0 The company could not on its own give the purchaser the certainty it wanted by way of a vesting order.\u00a0 So an insolvency process was required.<\/p>\n

What kind of\u00a0stalking horse<\/em>\u00a0insolvency process?<\/strong><\/h2>\n

There are generally three insolvency options.\u00a0 Some are not necessarily mutually exclusive.\u00a0 They are:<\/p>\n