From Allens to Rogers Bancshares, Bankrupt Firms Still Entice Buyers

by Mark Friedman  on Monday, Jan. 20, 2014 12:00 am  

An auction is scheduled Feb. 3 to sell the assets of Allens Inc., the Siloam Springs cannery, out of its Chapter 11 bankruptcy.

U.S. Bankruptcy Judge Ben Barry is expected to approve the sale on Feb. 10. It will be the latest example of a trend of companies buying assets out of bankruptcy.

On Nov. 25, Simmons First National Corp. of Pine Bluff closed on its $53.6 million acquisition of Metropolitan National Bank of Little Rock. Simmons bought the bank from Metropolitan’s parent company, Rogers Bancshares Inc., while it was in Chapter 11 bankruptcy.

Businesses have been buying businesses out of bankruptcy for years and the trend should continue, said Michael Stewart, a partner in Faegre Baker Daniels LLP of Minneapolis, a 750-attorney law firm that focuses on financial restructuring services.

“More and more, we’re seeing bankruptcy used as a forum for disposition of assets,” he said.

The purchase of a bankrupt business, though, can be either a bargain or a bother for the new owner.

“Sometimes in bankruptcy proceedings, as a buyer you can get a bargain,” Stewart said. “By definition, the company is financially challenged, and because of that, it isn’t in a position of strength when dealing with potential buyers.”

Stalking Horse

Both Allens and Rogers Bancshares used a “stalking horse bidder” to set the opening bid for their assets in an auction.

Seneca Foods Corp. of Marion, N.Y., will be the stalking horse bidder in Allens’ case and is offering $148 million to buy the assets.

Other firms can submit bids to buy Allens, but Seneca will have the opportunity to match the price.

Using a “stalking horse bidder” is common in buying assets out of bankruptcy, Stewart said. “The benefit is … usually it provides some level of assurance for other bidders that somebody has come in and done due diligence,” he said.

And at least the stalking horse bidder thinks that the business is worth the opening bid. “The belief among investment bankers and professionals is that if you have a stalking horse, that will enhance the likelihood of a robust auction,” Stewart said.

In addition, bidders know the transaction is going to be quick and possibly close in around 60 days.

There’s also protection for the stalking horse bidder. If the bidder loses the auction, it will get a breakup fee. In Seneca’s case, it will receive $4.5 million.

The stalking horse bidder does have an advantage, said David Garner, an executive vice president at Simmons. “They have a lot of time up front, before everybody else, to do their due diligence,” Garner said.

Ford Financial Fund II of Dallas was the stalking horse bidder to buy Metropolitan National Bank from Rogers Bancshares. Ford Financial said it would pay $16 million for the bank.

During the auction for Metropolitan, the bidding with Arvest Bank of Fayetteville went through 19 rounds.

Garner said Simmons had a price it was willing to pay, but declined to say what it was. “You walk in with what your best offer is and if the price goes above that, then you walk away,” he said. “Fortunately, the bidding never reached a level that was above what we believed our best offer was for it. We were able to come out the victor in the auction process.”

Ford Financial also didn’t walk away empty-handed. Its bill for acting as the stalking horse bidder totaled $2 million.

Fresh Start

Buying assets out of bankruptcy court allows the buyer a fresh start because the debts are left behind in bankruptcy court. “It really gives new meaning to the words free and clear,” said Jacen Dinoff, principal and co-founder of the KCP Advisory Group of New York, which offers corporate transaction and reorganization services.

Buying a business out of bankruptcy gives the buyer “the opportunity to sleep at night knowing that what you see is what you get with that acquisition,” Dinoff said.

Still, he said, the new owner doesn’t want to make the same mistakes as the previous owner and land the company back in bankruptcy. He suggested potential buyers have their own corporate attorneys and financial advisers to assist them in structuring the price and the transaction.

Dinoff, who has been involved in more than 40 bankruptcies, said buying a business out of bankruptcy could be a good deal for the buyer if it’s done correctly.

Simmons’ Garner said Simmons isn’t suffering from buyer’s remorse.

Simmons recently announced it was closing 27 of its 88 Arkansas branches as a result of the Metropolitan purchase. “There are several locations where we have branches across the street and we have branch overlap,” Garner said.

He said the purchase has “absolutely been wonderful for us so far. We expect it to continue to be a good acquisition for many, many years,” Garner said.

 

 

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