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May 23, 2023 – The Court hearing the Bighorn Restaurant cases issued an order: (i) approving bidding procedures in relation to the sale of the substantially all of the Debtors’ assets, (ii) authorizing the Debtors to select one or more stalking horse bidders, (iii) authorizing the Debtors to offer bid protections to any selected stalking horse and (iv) approving an auction/sale timetable culminating in an auction on July 12th and a sale hearing on July 18th [Docket No. 165].
The bidding procedures order is somewhat unusual, reflecting the fact that the Debtors have a "proposed" stalking horse (and a "proposed" APA with a "proposed" purchase price) but did not ask the Court to approve that APA with this bidding procedures order; suggesting that either the Debtors or the prospective stalking horse (High Bluff Partners, see just below) …or both (but likely the latter)…are not yet prepared to make the leap.
The delay/uncertainty may relate to the fact that the High Bluff does not want all of the Debtors' restaurants, many of them underperforming…which is why the Debtors are in bankruptcy in the first place (see "Events…" below). At filing, the Debtors noted that they had a stalking horse in the wings in respect of "substantially all" of their assets (ie 108 restaurants, with an additional 39 closed just prior to filing), while the High Bluff Partners very quietly filed APA now specifies "not less than 53 and up to 73 restaurants, with the potential to add up to 15 additional restaurants." This is not a half-baked APA, with detailed schedules already filed (eg, crew member M. Lines gets to keep their job), but there may be some ongoing diligence as to a few borderline restaurants. In what is perhaps a positive sign as to the sale process, the approved auction and sale hearing dates are now 2/3 days earlier than the dates initially proposed.
So, we currently have a bidding procedures order that still generically contemplates the naming of a stalking horse that includes bidder protections that are keyed off of a specific purchase price in the "proposed" APA with High Bluff Partners (NB: the Debtors have also filed a form APA for further prospective bidders); and separately have a motion (with a proposed order attached) to approve a stalking horse [Docket No. 123] still floating out there.
On May 15th, the Debtors filed an executed stalking horse asset purchase agreement (the “APA”) entered into with ARC Burger, LLC* (the “Stalking Horse Bidder,” $11.7mn cash purchase price with bid protections including a $351k break-up fee and a $150k expense reimbursement [Docket No. 123, with copy of the Stalking Horse Purchase Agreement attached at Exhibit 1].
* ARC Burger is an acquisition vehicle formed by private equity house High Bluff Capital Partners ("High Bluff") which already has in its portfolio of fast food/QSR restaurant groups…Church's Chicken, Quiznos and Taco del Mar. High Bluff Capital Partners provides as to itself: "High Bluff Capital Partners is a private investment firm that specializes in making control-oriented equity investments in iconic consumer-facing companies. The firm’s team has over 30 years of experience managing, investing, leading and transforming consumer businesses across the restaurant, entertainment, food, beverage and retail markets. High Bluff is based in San Diego, California." The APA provides the address of counsel Dentons (US) LLP (which also represented High Bluff in its acquisition of Church's Chicken in 2021) for notices but is signed by Coady Smith of High Bluff.
Key Terms of Stalking Horse APA
- Bighorn Restaurants, LLC;
- Summit Restaurant Holdings, LLC;
- Empire Restaurants, LLC;
- Heartland Restaurants, LLC;
- Atlantic Star Restaurants, LLC; And
- Summit Restaurant Development, LLC
- Buyer: ARC Burger, LLC an acquisition entity created by private equity house High Bluff Capital Partners
- Purchase Price: $11.7mn cash as adjusted (see Clause 3.2 of APA)
- Acquired Assets: Not less than 53 and up to 73 restaurants, with the potential to add up to 15 additional restaurants (schedules filed with APA). The Acquired Assets includes Assumed Contracts and Assumed Leases, Fixed Assets, Inventory, Permits, Change Fund, Prepaid Expenses, Goodwill and other Intangibles, Point of Sale Equipment, Warranties, Tax Records, Advertising Materials, Avoidance Actions related to Assumed Contracts and Assumed Leases, Acquired Business Information
- Deposit: $585k
- Bid Protections: Break-up fee of $351k (plus 3% of any offer over its own $11.7mn bid) and a $150k expense reimbursement. The bidding procedures also include provisions as to a $250k minimum overbid and $100k bid increments. Qualified bidders will have to top High Bluff's bid by $760k.
Approved Key Dates
- Qualifying Bid Deadline: July 10, 2023
- Auction: July 12, 2023
- Sale Objection Deadline: July 14, 2023
- Sale Hearing: July 18, 2023
- Sale Closing Deadline: August 14, 2023
On May 4, 2023, Bighorn Restaurants, LLC and five affiliated debtors (together “Bighorn” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $1.0mn and $10.0mn; and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtors, who are franchisees in respect of @108 Hardee’s restaurants* in Alabama, Florida, Georgia, South Carolina, Kansas, Missouri, Wyoming and Montana, noted that: "Over the past several years, and particularly as a result of the COVID-19 pandemic, franchisees system-wide have experienced declining foot traffic…External pressures resulting from the pandemic, including recent increases in wages and the cost of labor, shipping and food inflation, decreased availability of labor, and inflation generally have driven the Debtors’ cash flow issues….Many of the Restaurants were underperforming restaurants which demonstrated an inability to grow annual volumes. These lower volumes resulted in smaller profit margins and thus greater sensitivity to the recent dramatic rise in labor, commodity prices, and maintenance costs."
* The Debtors, who are down to the current 108 restaurants having already closed 39, are part of a larger group of affiliated companies (the "Capstone Group”) that operates and franchise over 226 restaurants in 16 states through a variety of brands, including Hardee’s and Carl’s Jr. Each of the Restaurants is subject to its own Restaurant franchise agreement, by and between CKE Restaurant Holdings, Inc. (“CKE”) and the applicable operating subsidiary Debtor, Empire, Heartland, Bighorn, and Atlantic Star (collectively, the “Franchise Agreements”).
The Debtors' motion [Docket No. 92] states “Prior to commencing these Chapter 11 Cases, the Debtors engaged Brookwood Associates and undertook an extensive marketing process that has generated substantial interest in the business. As mentioned above ARC Burger, LLC has been selected by the Debtors as the Stalking Horse Bidder herein as further described in the Sale Motion. The Debtors have retained Brookwood Associates to, among other things, assist the Debtors in a marketing process for potential additional bidders for the Debtors’ assets. Consistent with that process, the Debtors now file this Motion seeking approval of Bidding Procedures to continue their marketing efforts and complete a sale of their assets or equity in a manner that maximizes the value of the Debtors’ assets.
Preserving value for the benefit of the Debtors’ estate depends in large part on the Debtors proceeding swiftly to completion of a sale. The Bidding Procedures are designed to—and the Debtors believe the Bidding Procedures will actually operate to—maximize the likelihood of an acceptable bid for the benefit of enterprise-wide stakeholders.
Brookwood Associates, in consultation with the Debtors have developed a list of more than ninety parties whom they believe may be interested in, and whom are believed would have the financial resources to consummate a purchase of substantially all of the Debtors’ assets. The list of parties includes strategic investors and financial investors (collectively, the ‘Contact Parties’). Since being engaged in early 2023, Brookwood Associates contacted over 40 Contact Parties and provided them with a generic teaser. Sixteen of the initial Contact Parties executed confidentiality agreements and the Debtors received a total of four letters of interest. The Contact Parties may include parties whom the Debtors or their advisors previously contacted regarding a transaction, regardless of whether such parties expressed any interest at such time in pursuing a transaction. The Debtors will continue to discuss and may supplement the list of Contact Parties throughout the marketing process, as appropriate. Since the filing of these cases, Brookwood Associates has commenced contact with the remaining fifty or more Contact Parties that were not previously contacted.
With the assistance of Mr. Dooley and the Debtors’ management team, Brookwood Associates has established a data room for prospective purchasers. Brookwood Associates will continue to aggressively market the Debtors’ assets during the Chapter 11 Cases to the Contact Parties and any others who may have interest in the Debtors’ assets.
The motion continues, The Debtors believe that the proposed Bidding Procedures represent the best avenue for identifying and promoting active bidding from interested and financially capable parties and will maximize the value the Debtors will receive from the Transaction for the benefit of the Debtors’ estates. The proposed Bidding Procedures will allow the Debtors to conduct the Auction in a controlled, fair, and open fashion that will encourage participation by financially capable bidders who can demonstrate the ability to close a Transaction. In particular, the Bidding Procedures contemplate an open auction process with minimum barriers to entry and provide potential bidding parties with sufficient time to perform due diligence and acquire the information necessary to submit a timely and well-informed bid.
The Debtors believe that the proposed Bidding Procedures provide an appropriate framework for expeditiously establishing that the Debtors are receiving the best and highest offer for a Transaction, will encourage competitive bidding, are appropriate under the relevant standards governing auction proceedings and bidding incentives in bankruptcy proceedings, and are consistent with the controlling legal standard. Accordingly, the Court should approve the Debtors’ adoption of the Bidding Procedures as reasonable and appropriate and a valid exercise of the Debtors’ business judgment.”
Goals of the Chapter 11 Filing
Dooley Declaration (defined below) states: "The Debtors filed these chapter 11 cases to complete the contemplated Sale Transaction on an expedited basis."
Prepetition Marketing Efforts and Selection of (Then Un-named) Stalking Horse
The Dooley Declaration provides: "Approximately six weeks prior to filing, the Debtors engaged Brookwood Associates, LLC ('Brookwood') to act as investment banker…to market the Debtors’ assets (the 'Prepetition Marketing Process') in connection with the sale of all or a part of the Debtors (the 'Sale Transaction')….Prior to the Petition Date, the Debtors entered into an Asset Purchase Agreement with that certain buyer as the proposed initial 'stalking horse” bidder to purchase substantially all of the Debtors’ assets subject to this Court’s approval and in accordance with 11 U.S.C. § 363….the Debtors intend to seek approval of certain critical path dates regarding the Debtors’ need to close on the sale of its assets by August 2023….The Debtors’ failure to expeditiously move toward a sale and address assumption and assignment of certain unexpired leases would cause the Debtors’ estates immediate and irreparable harm by forcing the Debtors to assume or reject unexpired leases for non-residential real property and take the risk that any assumed leases would be assigned to a willing buyer."
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Dooley Declaration), Daniel F. Dooley, the Debtors’ financial advisor commented: “Over the past several years, and particularly as a result of the COVID-19 pandemic, franchisees system-wide have experienced declining foot traffic. The Debtors’ business also suffered significantly from loss of foot traffic, resulting in declining revenue without proportionate decreases in rental obligations, debt service, and other liabilities. External pressures resulting from the pandemic, including recent increases in wages and the cost of labor, shipping and food inflation, decreased availability of labor, and inflation generally have driven the Debtors’ cash flow issues.
Many of the Restaurants were underperforming restaurants which demonstrated an inability to grow annual volumes. These lower volumes resulted in smaller profit margins and thus greater sensitivity to the recent dramatic rise in labor, commodity prices, and maintenance costs….As a result, although certain of the Restaurants are profitable, others were operating at a loss for a prolonged period of time, resulting in the Debtors’ inability to meet financial obligations timely."
The Debtors are party to a December 2020 Loan and Security Agreement (the “Credit Agreement”) with Cadence Bank as lender. As of the Petition date, the Debtors are in default in respect of the Cadence facility and owe Cadence $22,121,060, plus accrued and unpaid interest, etc.
As at the Petition date, the Debtors also have @$6.0mn of unsecured debt, which primarily consists of (i) amounts due to franchisor CKE pursuant to the franchise agreements for royalties, advertising contributions, etc, (ii) amounts due landlords in respect of leases and (iii) "certain more limited prepetition amounts…owed to vendors."
About the Debtors
The Dooley Declaration provides: "Together, the Debtors constitute one of the largest current franchisees of Hardee’s restaurants. The Debtors formerly operated over 145 Hardee’s restaurants; the Debtors recently closed 39 restaurants and currently operate 108 Hardee’s restaurants (the "Restaurants'). The Restaurants span the states of Alabama, Florida, Georgia, South Carolina, Kansas, Missouri, Wyoming and Montana.
Corporate Structure Chart
Debtors Summit Holdings, Empire, Heartland, Bighorn, and Atlantic Star are Delaware limited liability companies formed under the laws of the State of Delaware. Debtor Summit Development is a Colorado limited liability company formed under the laws of the State of Colorado. Summit Holdings is a holding company and the sole member and 100% owner of Debtors Empire, Heartland, Bighorn, Atlantic Star, and Summit Development. The sole member and 100% owner of Summit Holdings is LB Summit, LLC. LB Summit, LLC is managed by Dewey R. Brown and Todd Pahl. Dewey R. Brown and Todd Pahl also manage Summit Holdings,
Empire, Heartland, Bighorn, Atlantic Star, and Summit Development.
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