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January 4, 2021 – The Court hearing the Francesca’s Holdings Corporation cases issued an order (i) approving bidding procedures for the sale of substantially all of the Debtors' assets, (ii) approving "the process for designation of stalking horse bidder and provision of bid protections" and (iii) adopting a proposed timetable culminating in a January 15, 2021 auction and a January 21, 2021 sale hearing [Docket No. 266].
The awkwardly worded order as to "process…and provision of bid protections" follows an objection from the U.S. Trustee assigned to the Debtors' cases and mounting uncertainty as to the role of onetime presumptive stalking horse TerraMar Capital LLC ("TerraMar") in the sale process. The U.S. Trustee, noting that a promised asset purchase agreement with TerraMar had not materialized (the Debtors had earlier noted that an existing letter of intent with TerraMar as to a $23.1mn bid would be replaced by an agreed APA within 10 days of the Petition date), asked the Debtors to hold their horses as to bid protections, given that there might not even be an actual stalking horse to protect. In its proposed revised order (blackline filed at Docket No. 266) now adopted, the Debtors effectively concede the U.S. Trustee's point and remove specific bid protections in favor of a generic right to go back and request them from the Court should a stalking horse appear.
We last saw TerraMar in the Sugarfina bankruptcy cases where its involvement as stalking horse and DIP lender drew considerable opposition and ultimately resulted in a change of stalking horses and ultimate purchaser (see our separate coverage on Sugarfina). Are we seeing a repeat?
On December 4, 2020, the Debtors requested each of a bidding procedures order and a sale order in respect of a proposed section 363 sale of substantially all of their assets (the "Sale") [Docket No. 45]. The then requested bidding procedures order would have (i) authorized the Debtors’ to enter into stalking horse arrangements with TerraMar Capital LLC (the “Stalking Horse Bidder,” $23.123mn opening bid), (ii) approve bidder protections for the Stalking Horse Bidder and (iii) approve a proposed timetable culminating in January 15, 2021 auction and a January 19, 2021 sale hearing. The sale order would approve the Sale.
Although the timetable remains largely intact, as required by antsy debtor-in-possession ("DIP") lenders, the Court's issued order makes no mention of TerraMar, nor do the Debtors in their recent Court filings, including in respect of its heavily revised proposed bidding procedures order.
For these Debtors, the need to pursue an asset sale transaction became crystal clear during their efforts to secure DIP financing; the Debtors noting: "it became evident that no financing sources emerged who were willing to extend sufficient financing to pay the Debtors’ obligations, including deferred rent, and a restructuring was not feasible without a sale of a majority interest in the Debtors’ business [and] the ability to sell the business free of liens and claims and the resulting expectation that significant cost savings could be achieved through a court process that would not be achievable out of court."
The Debtors bidding procedures motion states, “The Debtors believe that the auction process and time periods set forth in the Bidding Procedures are reasonable and will provide parties with sufficient time and information necessary to formulate a bid to purchase the Assets. Given the Debtors’ extensive prepetition marketing efforts, the proposed timeline is more than sufficient to complete a fair and open sale process that will maximize the value received for the Assets. Moreover, the sale timeline outlined below was extensively negotiated with the DIP Lender and the DIP Agent, who made clear that an expedited process was an essential condition to their agreement to continue to fund the Debtors’ ongoing operations and allow the Debtors access to cash collateral. The Debtors are also confident that the proposed timeline will provide both Interested Parties with sufficient time to complete due diligence and engage with the Debtors on a possible bid, particularly since the majority of the Interested Parties have been in contact with FTI for several weeks.”
The Clarke Declaration [Docket No. 36] adds: "Based on the responses to FTI’s [DIP financing] outreach, it became evident that no financing sources emerged who were willing to extend sufficient financing to pay the Debtors’ obligations, including deferred rent, and a restructuring was not feasible without a sale of a majority interest in the Debtors’ business. Although the Debtors continued to explore out-of-court options, it became evident that it might be necessary for the Debtors to commence chapter 11 cases to facilitate a sale of substantially all of the Debtors’ assets as a going concern under section 363 of the Bankruptcy Code (the ‘Sale Transaction’), given the ability to sell the business free of liens and claims and the resulting expectation that significant cost savings could be achieved through a court process that would not be achievable out of court.
For over two months prior to the Petition Date, FTI, on behalf of the Debtors, conducted a broad outreach to potential strategic and financial buyers. FTI contacted approximately 139 potential acquirers (collectively, the 'Interested Parties') to alert such parties of the Debtors’ interest in pursuing a Sale Transaction and sent teasers and non-disclosure agreements to each of the parties. 37 Interested Parties executed non-disclosure agreements and were given the opportunity to access certain documents in an electronic data room containing more extensive documentation regarding the Debtors’ finances and asset holdings and submit initial, non-binding letters of intent ('LOIs'). As of December 3, 2020, the Debtors had received three LOIs outlining the terms of a stalking horse bid for substantially all of the Debtors’ assets as a going concern. The Debtors also received indications of interest from several other parties interested in various transactions including inventory liquidations and intellectual property or e-commerce sales.
Following extensive negotiations with the Interested Parties and review and consideration of the LOIs and all other indications of interest, the Debtors have determined, in consultation with their advisors, that the LOI received by TerraMar Capital LLC (the 'Stalking Horse Bidder') to acquire substantially all of the Debtors’ assets through an affiliate had submitted the highest or otherwise best offer (the 'Stalking Horse LOI'). On December 3, 2020, prior to the commencement of these chapter 11 cases, the Debtors entered into the Stalking Horse LOI, which outlines the terms on which the Stalking Horse Bidder will acquire substantially all of the Debtors’ assets (the 'Stalking Horse Bid'), subject to diligence, negotiation, and execution of a definitive asset purchase agreement. The Stalking Horse LOI contemplates execution of an asset purchase agreement acceptable to the Debtors and the Stalking Horse Bidder (the 'Stalking Horse Agreement”) within ten days of the Petition Date, which if executed would supersede the Stalking Horse LOI in all respects. Additionally, as discussed in further detail in Part III, if executed, the Stalking Horse Agreement will provide the Stalking Horse Bidder with certain customary Stalking Horse Bid Protections…if the Stalking Horse Bidder is ultimately not the successful purchaser of the Debtors’ assets."
We last saw TerraMar in the Sugarfina bankruptcy cases where its involvement as stalking horse and DIP lender drew considerable opposition and ultimately resulted in a change of stalking horses and ultimate purchaser (see our separate coverage on Sugarfina).
- Target date to file proposed Sale Order: January 9, 2021
- Bid Deadline: January 13, 2021
- Qualified Bidders: January 14, 2021
- Sale Objection Deadline: January 14, 2021
- Auction Date: January 15, 2021
- Sale Hearing: January 21, 2021
Key Terms of the TerraMar Stalking Horse Agreement:
- Purchase Price:The ‘Purchase Price’ will be comprised of (a) $17.0mn in cash which shall be (i) reduced by the Seller Cure Cost Responsibility (defined below) and (ii) adjusted downward by a working capital adjustment mechanism to be agreed upon with the target set forth below; plus (b) the assumption of (i) gift card liabilities in an amount not to exceed $3.123mn and (ii) payroll taxes deferred through December 2020 under the CARES Act up to $3.0mn. For the avoidance of doubt, before any adjustments as described in clauses (a)(i) and (a)(ii), the Purchase Price shall be $23.123 million.
- ‘Seller Cure Cost Responsibility’ shall mean (a) the first $1.5 million of aggregate cure costs under assumed executory contracts and unexpired leases (‘Cure Costs’), plus (b) 50% of any total Cure Costs between $3.0 million and $5.8mn.
- ‘Purchaser Cure Cost Responsibility’ shall mean (a) 100% of Cure Costs between $1.5mn to $3.0mn in Costs, plus (b) 50% of any Cure Costs between $3.0mn and $5.8mn, plus (c) 100% of any Cure Costs above $5.8mn.
- The target working capital shall be $1,927,761 of accounts receivable, $25,011,312 of inventory, $425,000 of freight, and $4,989,000 of prepaid maintenance, inventory and supplies. The Purchase Price will be adjusted downward on a dollar-for-dollar basis, measured individually for each item, if the delivered amount at Closing is less than these target numbers.
- Bidder Protections: (i) Break-up fee of $693k and (ii) expense reimbursement of up to $350k. The Debtors have also proposed an "Initial Overbid Amount" of $250k and further minimum bid increments of $100k.
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