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December 3, 2019 – Further to a settlement reached during a Court recess, an objection filed by the Debtors' Official Committee of Unsecured Creditors (the “Committee”) to the selection of Marquee Brands, LLC (“Marquee”) as stalking horse bidder has been withdrawn; and the Court has issued an order [Docket No. 398] approving (i) Marquee as the stalking horse bidder and (ii) bid protections in favor of Marquee that the Committee had labeled as "unnecessary and unwarranted."
The settlement stipulates that the Debtors and Marquee will amend their asset purchase agreement (the "APA") with two modest changes that will earmark $450k to cover 503(b)(9) (ie administrative) claims. Half of this will effectively come from a $225k increase in the purchase price to be paid by Marquee and the other half is to be provided by the Debtors from off the top of the $50.0mn in sale proceeds. Although the changes address the Committee's concern that Marquee's (low) bid would leave the Debtors administratively insolvent, this is far from a victory for the Committee which had argued that the $50.0mn stalking horse bid was too low and too rushed, leaving the Debtors' estate (and the Committee's creditors) with little more than liquidation value for the Debtors' assets and with very little time to find a more valuable "going concern" bidder.
The settlement is not reflected in the Court's order beyond a handwritten "as modified on the record" comment inserted by Judge Brendan Linehan Shannon. The order reads in relevant part: "The Debtors have demonstrated the Bid Protections are actual and necessary costs and expenses of preserving the Debtors' estates, within the meaning of section 503(b) of the Bankruptcy Code, and of substantial benefit to the Debtors' estates by inducing the Stalking Horse Bidder's Bid, which has established a bid standard or minimum for other bidders for the Acquired Assets, thereby ensuring that during the Auction, if any, the Debtors receive the highest or best Bid possible for the Acquired Assets. The Debtors have also demonstrated that the Stalking Horse Bidder required Bid Protections set forth in the Motion as a condition to agreeing to be the Stalking Horse Bidder , such Bid Protections are reasonable, and such Bid Protections are of substantial benefit to the Debtors' estates by inducing the Stalking Horse Bidder's Bid."
The Committee Objection
December 2, 2019 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors' motion requesting Court approval of the selection of Marquee Brands, LLC (“Marquee”) as a stalking horse bidder in respect of certain of the Debtors' assets (collectively, the “Acquired Assets”); taking particular issue with what it argues are inappropriate bidder protections [Docket No. 356]. The Acquired Assets, in respect of which Marquee has agreed to bid $50.0mn, include, inter alia, the Debtors' e-commerce business, intellectual property, store-in-store operations and the right to manage the sale of certain inventory. For the Committee, it is not the cost of the bidder protections (3.5% inclusive of an expense reimbursement) that is offensive, but rather the fact of having any bidder protections at all. Why, the Committee asks, protect a bid that achieves nothing more than liquidating the Acquired Assets (which the Debtors could do themselves, thank you), stifles possible interest from going concern bidders and leaves the Debtors administratively insolvent?
The Committee’s objection elaborates, “The Committee objects to the granting of any Bid Protections to the Stalking Horse Bidder because the proposed transaction contemplated by the Stalking Horse APA does not set a high enough floor for the December 9th Auction to warrant the award of a break-up fee or expense reimbursement, nor is there evidence that the Bid Protections are necessary to preserve the value of the estates. The Stalking Horse APA is not a going concern bid. The Stalking Horse Bidder has not committed to assume the leases for any of the Debtors’ prepetition stand-alone stores or leased departments in other national retailers. Instead, the Stalking Horse Bidder apparently anticipates liquidating the inventory in all remaining store locations, shuttering the Debtors’ retail stores, operating the Debtors’ e-commerce platform, and purchasing designation rights for the Debtors’ leases in the event it locates an operating partner who wants to assume certain of the Debtors’ leases.
The cash consideration in the Stalking Horse APA produces little more than liquidation value of the Debtors’ assets and may net these estates less than the full liquidation value of the purchased assets, according to prepetition appraisals that allowed the Debtors to borrow approximately $46.9 million from their secured lenders. The Cash Collateral Budget approved by the Court assumed approximately $57 million in sale proceeds. However, the $50 million purchase price set forth in the Stalking Horse APA and Motion, which is subject to a $4 million hold back and other adjustments, falls short of that assumption and is insufficient to ensure the administratively solvency of these cases, including payment of section 503(b)(9) claims and other administrative claims that the Debtors deferred pending the results of the sale process. In fact, the consideration provided by the Stalking Horse APA may not be sufficient to satisfy the Debtors’ obligations under the transition services agreement required by the transaction.
Against this backdrop, the Stalking Horse Bid does not confer any more value on the Debtors’ sale process than liquidation bids for the Debtors’ inventory and intellectual property. Additionally, given the short time frame between the December 3rd hearing and the December 5th bid deadline, the market will have little time to react and respond accordingly. The Debtors provided no evidence that the Stalking Horse Bid is more likely to generate new topping bids any more than providing copies of the prepetition appraisals of the Debtors’ inventory and intellectual property themselves. Therefore, the Bid Protections are unnecessary to preserve the value of these assets for the estates…Unless and until the Stalking Horse Bidder or any other potential purchaser agrees to a sale transaction that preserves the Debtors’ operations as a true going concern and/or ensures the payment of section 503(b)(9) claims and other administrative claims that the Debtors deferred until the secured lenders are paid in full, the Committee respectfully submits that the granting of Bid Protections is unnecessary and unwarranted in these cases.”
In the asset purchase agreement entered into amongst the Debtors, Marquee and a contractual joint venture composed of Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC (together, the “Agent”), Marquee has agreed to pace bidding for the Acquired Assets with an offer of $50.0mn. The Agent, effectively working on behalf of Marquee will “sell or otherwise designate the disposition of certain of the Debtors’ inventory, fixtures and equipment, and other designated assets through store closing sales at the 235 stores where closing sales are not already in process, and will govern the wind down of the Debtors’ leased store business.”
The Debtors' motion states, “On November 29, 2019, the Debtors, Marquee (the 'Stalking Horse Bidder'), and a contractual joint venture composed of Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC (together, the “Agent”) entered into an asset purchase agreement…whereby the Stalking Horse Bidder proposes to purchase the Debtors’ e-commerce business, intellectual property, store-in-store operations, and the right to designate the sale of certain inventory and related assets for cash consideration of approximately $50 million, subject to certain holdbacks and adjustments (the 'Purchase Price')…The Agency Agreement provides for the Agent to sell or otherwise designate the disposition of certain of the Debtors’ inventory, fixtures and equipment, and other designated assets through store closing sales at the 235 stores where closing sales are not already in process, and will govern the wind down of the Debtors’ leased store business. The Stalking Horse APA also contemplates entry into a Transition Services Agreement, pursuant to which the Debtors will provide certain services to the Stalking Horse Bidder for a period following consummation of the transaction while operation of the Debtors’ Acquired Assets are transferred and the Debtors’ stores and leased departments are wound down.
Pursuant to the Bid Procedures, the Debtors will continue to solicit higher or otherwise better proposals. The Debtors believe the Bid Procedures will provide sufficient time for any potential topping bidder to put forth an actionable competing Bid with the Stalking Horse Bid. This market-tested process will yield the best value for the Assets and, in turn, maximize recoveries for the Debtors’ stakeholders. As set forth in the Stalking Horse Declaration, the 'floor' price set by the Stalking Horse Bid ensures the Debtors can fund recoveries to their secured lenders, while preserving a portion of their business, with the opportunity to further increase value to the estate by seeking higher or otherwise better bids.”
Key Terms of Stalking Horse APA
- Seller: Destination Maternity Corporation
- Purchaser: Marquee Brands, LLC
- Purchase Price: Cash Purchase Price: $50.0mn, subject to certain adjustments.
- Stalking Horse Bid Protections:
- Breakup Fee: 3.5%
- Expense Reimbursement: up to $750k, credited against the Breakup Fee
- Closing and Other Deadlines: Closing: December 20, 2019
- Good Faith Deposit: $5.0mn
- Sale Objection Deadline: December 6, 2019
- Bid Deadline: December 5, 2019
- Sale Hearing: December 12, 2109
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