Alpha Entertainment LLC (XFL) – Cancels Auction and Selects Alpha Acquico as Successful Bidder, Creditors’ Committee Calls Foul and Argues Sale Leaves it Stuck Between a Rock and an Asset Stripping Hard Place

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August 3, 2020 – Further to a May 28th bidding procedures order [Docket No. 181], the Debtor notified the Court that they had canceled a scheduled auction and designated Alpha Acquico, LLC (“Alpha Acquico”) as the successful bidder for substantially all of the Debtor's assets [Docket No. 338]. Alpha Acquico, the notice states, is a joint venture between The Garcia Companies and Redbird Capital Partners Management LLC  and their successful bid (they were the only qualified bidder) was comprised of (i) $15.0mn cash, (ii) the assumption of certain specified liabilities and (iii) the payment of cure amounts of up to $8.5mn. 

The exact ownership of acquisition vehicle Alpha Acquico (no surprise that it sounds like a tequila) is uncertain, but in addition to the parties named above also clearly includes entrepreneur Dwayne "The Rock" Johnson who "continues to grow his groundbreaking success while managing his ever-expanding and diverse entertainment portfolio," including with the recent launch of a tequila.

In a press release announcing their successful bid, Alpha Acquico stated: "Dany Garcia, Dwayne Johnson and RedBird Capital Partners have been selected as the winning bidder for substantially all of the assets of Alpha Entertainment LLC, the parent company of the XFL. The XFL assets will be sold to Garcia, Johnson and RedBird for approximately $15 million, in accordance with the terms and conditions of the asset purchase agreement. The transaction is subject to bankruptcy court approval at a hearing this Friday, August 7 and, assuming that closing conditions are satisfied, is expected to close on or shortly after August 21."

To date it does not appear that the relevant asset purchase agreement (the "APA") has been filed but one exists and it has been reviewed (disapprovingly) by the Debtors' Official Committee of Unsecured Creditors (the "Committee") who are objecting to the sale as proposed [Docket No. 339]. The Committee, which had earlier objected to the then role off Vince McMahon as a potential stalking horse (for his own bankrupt assets), now objects to the sale of the Debtor's business before the value of avoidance actions is properly assessed. These actions, which would become the property of Alpha Acquico, could have a value of over $60.0mn and reflect transfers made by the Debtor in the year prior to its Chapter 11 filing that may now be the grounds for insider claims.

The Committee states: "While the Committee has been and remains supportive of a competitive sale process run by the Debtor that attracted a qualifying bid from the Proposed Buyer, the Debtor’s role as a fiduciary to the estate and its constituents does not end with securing that offer. Rather, the Debtor has an ongoing obligation to negotiate terms with the Proposed Buyer that are most favorable to the estate and do not unduly prejudice its creditors. The proposed APA, however, does not reflect such terms and seeks to strip the estate of valuable assets for no consideration. As such, the Committee has significant concerns that the Sale contemplated with the Proposed Buyer does not satisfy the sound business purpose test, and is not in the best interests of the Debtor’s estate."

What the Committee does not note on the subject of the purchaser's appetite for pursuing avoidance actions against insider dealings (and generally wanting this chapter of Vince McMahon's own entrepreneurial career to close relatively positively), is the longstanding relationship between Vince McMahon and Dwayne Johnson, here promising that he would "never, ever let Vince…[or, to be fair, his millions of fans] down." 2013 WWF Youtube clip here.

The main event (sale hearing) is scheduled for August 7th.

The objection continues: "More specifically, the APA that the Debtor now seeks to have the Court approve contemplates the sale of, among other assets, all claims and causes of action of the Debtor against any person (the ‘Causes of Action’), including all claims against statutory insiders (the 'Insider Claims') and chapter 5 causes of action (‘Avoidance Actions’). Moreover, because the Purchased Claims were expressly excluded from the Purchased Assets in the form asset purchase agreement prepared by the Debtor, parties in interest had no reasonable expectation from the Sale Motion or Bidding Procedures Order that a sale of the Debtor’s assets would include a sale of all Causes of Actions, Avoidance Actions and Insider Claims, among others. 

Based on the Debtor’s Statement of Financial Affairs [Docket No. 195] (‘SOFA’), and without considering any other claims and causes of action that may exist, the Debtor made transfers in excess of $49 million within 90 days of the Petition Date and an additional $12 million in transfers to statutory insiders within 1-year of the Petition Date. Yet, the Debtor has altogether failed to perform any analysis or valuation of the Causes of Action, including Insider Claims and Avoidance Actions, which are traditionally a valuable source of recovery for unsecured creditors. Without any analysis as to the value of the sweeping Purchased Claims, neither the Committee nor this Court can determine whether the $15 million purchase price for the Purchased Assets provides reasonable value to the Debtor’s estate. The Court should not countenance a process that permits assets that could yield a significant recovery for the estate to slip away without being valued at all by the Debtor and where the Debtor cannot establish that any effort has been made to maximize the Purchased Claims for the benefit of the Debtor’s estate."

Further Background

Committee Objection

On May 19, 2020, the Committee objected to the Debtor’s bidding procedures motion [Docket No. 146] arguing that the auction/sale timetable was way too fast and designed to serve the interests of the Debtor’s controlling shareholder Vince McMahon (the Committee, calling the Debtor a "shill" for McMahon's own aspirations to acquire the Debtors out of bankruptcy, had suggested 60 day extensions of sale-related deadlines). 

The Debtor responded to that objection by noting that McMahon would not be a bidder for the Debtor's assets: "Further, as the Committee is aware, McMahon announced last week during his deposition by Committee counsel that he will not be a bidder for the Debtor’s assets. Thus falls the center of the Committee’s house of cards. In the process, however, there is now one less potential bidder for the assets, which hardly benefits creditors…" [Docket No. 163].

The objection stated, “Unfortunately, the Debtor, at the behest of Vincent McMahon (“McMahon”), the Debtor’s controlling shareholder and recently secured lender, while acknowledging that these are the aims to be achieved, has done little more than act as a shill for McMahon. The Committee has requested that the sales process be extended 60 days, which request has been denied. The Debtor can readily reach this sale date by modifying its budget with no DIP loan, or, if McMahon seeks to pay ticket holders and continue retention of assets and employees that may ultimately inure to his benefit, he can provide a DIP loan without the crippling restrictions contained in the proposed DIP loan.

The essential steps needed to have a meaningful sales process were not taken prior to filing this chapter 11 case and have only just gotten underway. Despite the fact that the Debtor and McMahon knew full well before the filing that this case was going to involve a sales process, and with the passage of more than 30 days since the case was filed, no data room has been set up; no information memorandum, confidential or otherwise has been prepared; and prospective purchasers are being advised of deadlines to submit letters of intent and bids even though the Court has not approved such deadlines and the Bid Procedures Motion does not even mention a deadline for letters of intent. The bid process requires that McMahon receive all bids received by the Debtor along with confidential financial information about the financial wherewithal of prospective purchasers. No other prospective bidder is afforded such information. The auction sale is to be held 40 days after this hearing and if McMahon is the successful bidder, the bid procedures allow McMahon to receive a prophylactic free and clear sales order that will insulate him from claims that may be assertible against him for his conduct to date. If this is the choice afforded to creditors, the Committee prefers that this case be converted to chapter 7 so that a disinterested trustee can sell the assets in due course and bring whatever claims he deems appropriate.

The Debtor proposes an unnecessarily compressed sale timeline that is not designed to maximize value. Rather it is designed to minimize the opportunity for third parties to evaluate and bid upon assets that the insider to the Debtor, McMahon, seeks to acquire at the expense of the creditors of this estate. On the eve of the bankruptcy filing, McMahon made a low interest secured loan to the Debtor that has been coupled with a DIP lending facility and requires as a condition of the loan that there be an unreasonably abbreviated time period for prospective purchasers to conduct due diligence and bid on the Debtor’s assets. Thus, in consideration for making a short term favorable loan, McMahon more than offsets any benefit the estate would otherwise enjoy, subverting the right of third parties to have a robust auction process.

Corrective measures are also needed to address overreaches that have taken place in the limited time that the Debtor’s investment banker has been put in place. Teasers have been sent to prospective purchasers advising of an June 12 deadline to submit letters of intent. Although this date may be subject to change, it was selected without prior notice to the Court and parties in interest, nor was it mentioned in the Bid Procedures Motion. It certainly has not approved by the Court. These steps are detrimental to the sales process and prospective purchasers may elect to pass on the sale given the unreasonably short time periods involved. These missteps create the likelihood that some parties who may have otherwise been interested in the sale pass on the opportunity and that a false impression will be created that the Debtor was actively and properly marketed when such is not the case. Whether prospective purchasers will be willing to take a second look at the opportunity after having been given misleading information remains to be seen. In any event, this fosters an environment where purchasers, who may be concerned about a process that has been dominated to date by McMahon, the ultimate insider, will be fairly run.

The notion of an unnecessarily compressed timeline is also inconsistent with the Debtor’s desire to secure the Insider DIP which, if approved, would enable the Debtor to have more than sufficient liquidity to run a sale process for at least an additional few months in order to maximize value for the estate and its creditors. The Bidding Procedures should, therefore, be modified to extend the sale process by at least 60 days to facilitate appropriate market-testing for the assets and to ensure that there is a level playing field for all bidders.”

Bidding Procedures Motion and Order

[As previously reported] May 28, 2020 – The Court hearing the Alpha Entertainment case issued an order approving (i) proposed bidding procedures in relation to the sale of substantially all of the Debtors’ assets (the “Sale”) and (ii) a proposed schedule culminating in an August 3rd auction and an August 7th sale hearing [Docket No. 181]. The timetable, which had been vigorously objected to by the Debtors' Official Committee of Unsecured Creditors (the “Committee”) as way too fast and designed to serve the interests of the Debtor’s controlling shareholder Vince McMahon, has now slipped by about three weeks (the Committee, calling the Debtors' a "shill" for McMahon's own aspirations to acquire the Debtors out of bankruptcy, had suggested 60 day extensions of sale-related deadlines).

As part of what has been a contentious few weeks in the Debtors/McMahon vs Committee main event, McMahon, who claims to have invested $200.0mn in the Debtors, has stated that he will not be a bidder for the Debtors assets: "Further, as the Committee is aware, McMahon announced last week during his deposition by Committee counsel that he will not be a bidder for the Debtor’s assets. Thus falls the center of the Committee’s house of cards. In the process, however, there is now one less potential bidder for the assets, which hardly benefits creditors…" [Docket No. 163].

[As previously reported] April 21, 2020 – The Debtors filed a motion requesting each of a bidding procedures order and a sales order. The bidding procedures order would approve bidding procedures in relation to the sale of substantially all of the Debtors’ assets (the “Sale”), including proposed bidder protections and an auction schedule; and the sale order would authorize the Sale [Docket No. 55]. 

It is hard not to smile at the Debtor's contention that it engaged in "arm's-length negotiations" with its debtor-in-possession ("DIP") lender who appears to be in a hurry to get a sale done and have the Debtor's "core assets monetized." 

The Debtor and the DIP lender are of course essentially one and the same, wrestling impresario Jim McMahon, so "arms's-lengths negotiations" are either impossible or a truism; depending on how one looks at it. And that's before we get into the social distancing aspects of the negotiation…or wrestling federation rules…"

The Debtors' motion stated, “Prior to the Petition Date, the Debtor conducted business as the XFL professional American football league….Just weeks after the first XFL games were played, however, the worldwide COVID-19 pandemic forced every major American sports league to suspend, if not cancel, their seasons. On March 20, 2020, the XFL canceled the remainder of its inaugural season, costing the nascent league tens of millions of dollars in revenue….After considering all available strategic options, the Debtor and its professional advisors determined that the best course to preserve and maximize the value of the Debtor’s estate is through a chapter 11 sale process. The Acquired Assets are comprised of substantially all of the intellectual and personal property utilized by the Debtor in its operation of the XFL.

Following arms’-length negotiations, the Debtor and the DIP Lender reached agreement on a case timeline that adequately balances the Debtor’s need to execute a robust marketing process for the Acquired Assets with the need of its secured lender to have certainty on how and when the Debtor’s core assets will be monetized. To that end, the Debtor requests, pursuant to this Motion, a hearing to be held on regular notice for the approval of the Bidding Procedures.

The DIP Facility is conditioned on the Court entering the Bidding Procedures Order by May 15, 2020; and the Court entering the Sale Order by July 15, 2020. 

The Debtor is in the process of selecting an investment banker to assist with the sale process, and it is expected that its chosen candidate will be retained in the immediate future.”

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