BHCosmetics Holdings, LLC – Court Approves $4.3mn Asset Sale to RBI Acquisition Holdings with Distribution of Sale Proceeds Now Subject to Further Court Order

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February 18, 2022 – Further to a January 28th bidding procedures order [Docket No. 90] and a February 18th sale hearing, the Court hearing the BH Cosmetics cases issued an order approving the $4.3mn sale of a majority of the Debtors’ intellectual property and inventory to RBI Acquisition Holdings, LLC (the “Purchaser”) [Docket No. 182]. The Purchaser's January 14, 2022 APA is attached to the sale order at Exhibit A.

UPDATE: According to a declaration filed on February 25, 2022 by intellectual property disposition consultant Hilco IP Services, LLC [Docket No. 200], "On February 24, 2022, the sale of the Assets to the Successful Bidder closed for a final consideration of $3,906,088, as adjusted pursuant to the APA."

On February 14th, the Debtors’ Official Committee of Unsecured Creditors (the “Committee”) filed a limited objection to the asset sale [Docket No. 163, see further below] noting that it "objects to [prepetition secured lender] Fifth Third’s insistence on the turnover of sale proceeds prior to establishing a reasonable wind down budget and prior to the expiration of the Committee’s challenge deadline."

The Committee had some success on delaying the distribution of sale proceeds, with the sale order now providing: "the Debtors shall cause the net sale proceeds of all Assets that are subject to the Prepetition Loan Lenders’ first-priority liens and that are sold to the Buyer to be distributed to the Prepetition Loan Lenders upon entry of a further Court order approving the terms of the distribution; provided, however, that nothing in this Order shall alter, impair, or otherwise impact any of the Prepetition Loan Lenders’ rights regarding the proceeds of their collateral or the rights of the Debtors (except as previously waived) and Committee to object to the distribution of the sale proceeds, all of which rights are expressly preserved."

A number of other creditor specific objections are also addressed in the order with a blackline showing changes available at Docket No. 180.

Background

On February 11th, the Debtors notified the Court that absent the receipt of any further qualified bids, they had cancelled a February 15th auction and designated stalking horse bidder RBI Acquisition Holdings, LLC (the "Stalking Horse Bidder") as the successful bidder in respect of a majority of the Debtors’ intellectual property and inventory (the “Sale”) [Docket No. 159]. 

The Debtors' embarked on a section 363 sale process of IP assets after prepetition efforts failed to generate interest in a more comprehensive, going concern, sale (as described further below). RBI appears to be an acquisition vehicle created by the UK's Zeus Capital (or more likely, on behalf of a Zeus client). The RBI APA (see Docket No. 15) lists Zeus' Jordan Warburton as the contact person for RBI at Zeus' Manchester, UK address. 

In July 2021 Zeus acted as Nominated Adviser and Sole Broker to Revolution Beauty Group plc's ("Revolution") £300.0mn AIM IPO and in November 2021 Zeus acted as Financial Adviser to Revolution in connection with Revolution's £23.0 million acquisition of Medichem Manufacturing Ltd (“Medichem”), a British manufacturer of hair and beauty products (with Warburton acting on that transaction for Zeus). Revolution's cosmetic products competes in  the same "vegan free," "cruelty free," millennial market as the Debtors; and Medichem was Revolution's "first acquisition and provides the Group with its own, fully-owned and vertically integrated manufacturing business." Clearly a decent chance that the Debtors will constitute Revolution's second acquisition.

Marketing Efforts

At the end of September 2021, the Debtors retained SSG as investment banker to market the Company and solicit proposals from potential purchasers for the sale of the Company either as a going concern or otherwise. SSG contacted approximately 281 potential parties in interest, including various cosmetic companies, private equity firms, hedge and fixed income funds, distressed debt buyers, family offices, and certain other banks and companies ….Forty-five companies signed confidentiality agreements and were given access to a data room for purposes of performing diligence…and seven parties expressed interest in the Debtors and their Assets. Ultimately, the Debtors received a draft term sheet from a potential purchaser, but after consideration of the proposed terms, timing concerns, and other issues, and in consultation with their lenders, the Debtors determined that the draft term sheet was not actionable without major revision.

At the end of 2021, and further to its failed going concern sale efforts, the Debtors “determined that a sale…of the Company’s intellectual property assets and related tangible … may be necessary to maximize the value of the Debtors’ estates” and engaged Hilco Streambank to serve as consultant and sale agent to market and implement an IP sale.

The Debtors and Hilco Streambank contacted a total of 84 strategic parties and received responses from 32 parties with 15 parties executing NDAs and the Debtors ultimately receiving two written indications of interests (three parties expressed an interest in acting as a stalking horse).

Key Terms of the Stalking Horse APA:

  • Seller: BHCosmetics Holdings, LLC
  • Buyer: RBI Acquisition Holdings, LLC, a Delaware limited liability company
  • Purchase Price: $4.3mn
  • Bidder Protections: Break-up fee of $172k plus expenses of up to $150k
    in the aggregate.
  • Closing and Other Deadlines. The Stalking Horse Bid contemplates an outside closing date of February 24, 2022, which may be extended to March
    4, 2022. Other contemplated milestones are described in paragraph 13(d),
    above.

Committee Objection

The objection [Docket No. 163] states, “While disappointed the sale process did not generate competing bids, the Committee supports the Debtors’ sale efforts and has no challenges to the terms of the stalking horse agreement or the sale to RBI. The Committee, however, objects to Fifth Third’s insistence on the turnover of sale proceeds prior to establishing a reasonable wind down budget and prior to the expiration of the Committee’s challenge deadline.

The $300,000 allocated to wind down costs in the cash collateral budget is insufficient to effectively wind down these estates

The current wind down budget will only allow for a truncated wind down followed by conversion or dismissal….Before the sale is approved, and before any sale proceeds are distributed to Fifth Third, the Debtors must demonstrate the ability to effectively wind down the estates with a sufficient budget.

The sale proceeds should be escrowed and distributed to Fifth Third only after the establishment of an appropriate wind down budget and the conclusion of the Committee’s lien investigation. While the Committee is still conducting the lien investigation and reviewing the schedules of assets and liabilities filed one business day before the objection deadline to the Motion, the Committee believes there could be valuable unencumbered assets that are not subject to properly perfected liens. To allow the sale proceeds to be distributed to Fifth Third now, before the Committee can verify that the sale proceeds stem solely from assets subject to Fifth Third’s liens, would render the March 25, 2022 challenge deadline illusory.

The Court should not allow the Debtors to proceed down a path designed to benefit Fifth Third at the expense of all other stakeholders. If the Debtors and Fifth Third want to enjoy the benefits of chapter 11, they must leave the estates administratively solvent. As a result, the provision immediately distributing sale proceeds to Fifth Third should be removed from the proposed order unless Fifth Third agrees to work with the Committee and the Debtors to carve out sufficient cash and fund a realistic wind down process.”

About the Debtors

The Debtors are majority owned by mid-market private equity house MidOcean Partners ("MidOcean") which acquired its interest in January 2018 from BH Bonfire (terms were not made public).

In 2020, the Company’s revenue dropped from $55.8mn in 2019 to $33.6mn.

In 2021, the Debtors continued to struggle in a highly competitive, COVID-stricken market with matters made worse as liquidity issues piled up.

In detailing their descent into bankruptcy, the Debtors cited expensive and under-performing product lines in a highly competitive sector, the dramatic impact of COVID on cosmetic use (impacting the entire cosmetics sector [who needs lipstick under a mask while working from home?], but particularly impacting the Debtors who compete in the "color cosmetics" sub-sector), and the inability of celebrity influencers Doja Cat and Iggy Azalea to help the Debtors pull out of their revenue nosedive with new "Celebrity Influencer Product Lines." The emphasis on those two celebrity lines, given tightening liquidity, had the additional knock-on effect of delaying the launch of the Debtors' earlier planned "Itsa" product line.

According to the Debtors: “BH: Badass with Heart. We bring the best in cruelty free cosmetics that always break convention. We believe makeup shouldn’t be that complicated – experiment, enjoy and be kind to your wallet and planet while doing it. Our products are colorful and FUN – with no shortcuts.We are genuine, raw and stand fiercely for our core values. Show off your unique self, make an impact and stand out from the crowd – one look at a time."

The Ware Declaration adds: "Originally launched in 2009, the Debtors are a leading beauty brand specializing in high quality, clean, vegan, and cruelty-free cosmetics and other beauty products, with a specialty in color cosmetics, brushes for the application of cosmetics, and eyelashes. The Debtors sell their products on their e-commerce platform directly to consumers utilizing, among others, Shopify and Netsuite ERP, and wholesale to various retailers.

The Company’s product line features an array of color cosmetics and applicators. The Company’s business focuses on two sales channels: (i) its digital marketplace,
which utilizes a variety of social influencer, celebrity collaborations, and brand partnerships to promote and market its products, and (ii) wholesale sales channels, primarily to Ulta Beauty, Inc. and similar beauty stores. The Company’s target market includes 'Generation Z' and 'Millennial' consumers. The Company retains approximately 3.6 million Instagram followers and 1.8 million Facebook followers.

The Company’s operations are based in the Los Angeles, California area. Since early 2020, the Company’s headquarters has been located in Culver City, California. 

As of the Petition Date, the Debtors employed, in the aggregate, approximately 28 employees, all of whom work on a full-time basis. This reflects the reduction in
force conducted by the Debtors prior to the commencement of these Chapter 11 Cases. The Debtors’ employees are not covered by a collective bargaining agreement.

In the fourth quarter of 2017, the Debtors and/or their predecessors in interest commenced a series of transactions to effectuate the acquisition by MidOcean Partners V-BH, L.P. ('MidOcean') of 63% of the equity interests in Holdings from BH Bonfire, Inc. In addition, MidOcean funded capital infusions of $5.5 million and $4.5 million in November 2018 and February 2019, respectively, in exchange for Preferred Series A units in Holdings. In 2020, MidOcean funded $19.0 million of Preferred Series B units, increasing its ownership interests in Holdings to 74.4%. In 2021, MidOcean funded $3.5 million of Preferred Series B units further increasing its ownership interests to a total of 85.85% of the Company’s total membership units.

Corporate Structure

As reflected in the corporate structure chart below, "Holdings" is a holding company that owns 100% of the membership interests in BHCosmetics Intermediate, LLC
(“BHCosmetics Intermediate”); (ii) BHCosmetics Intermediate is a holding company that owns 100% of the membership interests in BHCosmetics, LLC (“BHCosmetics”); and (iii) BHCosmetics, which is the entity through which the Debtors conduct their business operations and which owns substantially all of the Debtors’ intellectual property and physical inventory assets, owns 100% of the membership interests in (a) Visceral Agency LLC, an entity through which the Debtors had intended to provide third parties certain creative content services, and (b) BH Cosmetics, GmbH, a non-debtor entity that engages in the sale of cosmetics and related beauty products in Germany.

 

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