In-Shape Health Clubs, LLC – Seeks Approval of Biding Procedures for ($45.3mn Credit Bid) Assets Sale to In-Shape Acquisition; January 13th Hearing

December 16, 2020 – The Debtors filed a motion requesting each of a bidding procedures order and a sales order [Docket No. 18]. The requested bidding procedures order would (i) approve bidder protections in respect of the sale of substantially all of the Debtors' assets (the "Sale"), (ii) authorize the Debtors’ to enter into an asset purchase arrangements with In-Shape Acquisition 2021, LLC (the “Purchaser,” $45.3mn credit bid), (iii) approve bidder protections for the Purchaser and (iv) approve a proposed timetable culminating in February 11, 2021 auction (if necessary) and a February 16, 2021 sale hearing. The sale order would approve the Sale. 

The asset purchase agreement (the “APA”) governing the terms of the sale is attached to the motion as Exhibit C.

The Purchaser is an acquisition entity created by a group that includes Paul Rothbard, a former CEO of the Debtors and son of the Debtors’ founder, and Aquiline Capital Partners LLP ("Aquiline") which recently (October 30, 2020) purchased the entirety of the Debtors’ prepetition senior debt ($64.7mn) from Bank of America, N.A. 

Pursuant to the terms of the APA, the Purchaser will, subject to the requirements of the Debtors’ intended section 363 sale/auction process, purchase substantially all of the Debtors’ assets and will assume the leases relating to up to 45 clubs and pay any associated cure costs. The agreed purchase price is comprised of a $45.3mn credit bid (prepetition and DIP debt) and $250k to cover the estates wind-down costs.

A separately filed DIP motion requests $30.3mn of DIP financing ($15.3mn of new money and a $15.0mn roll-up) to be provided by Aquiline. Milestones in the proposed DIP credit agreement include 80 days to complete the Sale.

Key Terms of Asset Purchase Agreement:

• Sellers: In-Shape Health Clubs, LLC, In-Shape Holdings, LLC and In-Shape Personal Training, LLC
• Purchaser: In-Shape Acquisition 2021, LLC
• Bidder Protections: Break-Up Fee of $1,000,000, expense reimbursement of $500k and incremental bids of $500k. The result is that any further bid must include cash of at least $48.05mn (although our math gets us to $47.55mn and it is unclear where the further $500k comes from, possibly a separate initial overbid requirement).
• Purchase Price: $45.3mn credit bid amount plus $250k to cover wind-down expenses. The APA provides: "On the terms and subject to the conditions hereof, at the Closing, Purchaser shall (i) pay, in cash, the Cash Payment [$250k]; (ii) decrease the amount of principal due under the loans due under the Pre-Petition Credit Facility by $10,000,000 pursuant to the credit bid of such amount, by the Agent on behalf of the Pre-Petition Secured Lenders, pursuant to an irrevocable instruction letter attached hereto as Exhibit I (the 'Bid Direction Letter') (such portion of the Purchase Price, the 'Credit Bid'); (iii) assume the Assumed DIP Claims pursuant to the DIP Claim Assignment and Assumption Agreement; (iv) assume the Assumed Pre-Petition Credit Facility Claims pursuant to the Pre-Petition Secured Claim Assignment and Assumption Agreement; and (v) assume the Assumed Liabilities as provided in Section 2.3 (the sum of (i)-(v) above, the 'Purchase Price'). At the Closing, the Deposit Amount shall be included in the Assumed Pre-Petition Credit Facility Claims and shall be applied to satisfy the entirety of such claims."

Proposed Key Dates

• Bidding Procedures Hearing: January 13, 2021
• Sale Objection Deadline: February 5, 2021
• Bid Deadline: February 8, 2021
• Auction (if necessary): February 11, 2021
• Sale Hearing: February 16, 2021

Prepetition Marketing Efforts

The motion explain the sale process, “[T]he Debtors engaged in a robust prepetition marketing process, led by their investment banker and financial advisors, Chilmark Partners LLP (‘Chilmark’). Chilmark, together with the Debtors’ management, identified strategic and financial parties who are in the fitness industry or who they believed would be interested in investing in the fitness space. On August 24, 2020, Chilmark initiated a marketing and sale process by contacting over one hundred potentially interested strategic and financial parties. Sixty-six of the parties contacted indicated interest and received a marketing teaser that Chilmark had prepared in advance to assist in the marketing effort. The initial outreach was wide ranging, and Chilmark is not aware of any potentially interested parties to which it did not contact about the investment opportunity. As such, additional time to conduct a second round of marketing outreach is unlikely to generate bona fide interest from new parties that were not part of the initial prepetition outreach efforts.

Of the parties contacted by Chilmark, 26 parties expressed a desire to engage in further due diligence and executed non-disclosure agreements. Chilmark managed the diligence process, including preparing and distributing a confidential information memorandum, populating a virtual data room with diligence materials, and arranging for meetings with management and onsite visits with interested parties

Ultimately, as a result of the pre-petition marketing process and the sale of the Prepetition First Lien Obligations to the Pre-Petition Secured Lenders [ie Aquiline], the Debtors negotiated the terms of a sale to the Purchaser pursuant to section 363 of the Bankruptcy Code, subject to higher and better bids and Court approval, as well as the terms of debtor-in-possession financing to fund the administrative expenses and certain other expenses associated with the filing of these chapter 11 cases. 

The Debtors have negotiated and entered into the Asset Purchase Agreement with an affiliate of the DIP Lenders (i.e., Purchaser), pursuant to which Purchaser will acquire the Purchased Assets on the terms and conditions specified therein.  

The sale transaction pursuant to the Asset Purchase Agreement is subject to competitive bidding as set forth herein, the Bidding Procedures, and the Bidding Procedures Order. Pursuant to the terms of the Asset Purchase Agreement, Purchaser has agreed to purchase the Purchased Assets for a purchase price of (i) $45,300,000 (the ‘Credit Bid Amount’), to be satisfied in the form of a credit against the obligations arising under the DIP Agreement and the Prepetition Credit Facility, plus (ii) a cash payment of $250,000 to cover certain of the Sellers’ post-Closing wind-down costs, and an additional amount of cash to cover certain other specified obligations, and (iii) assumption of all Cure Amounts for all Purchased Contracts and certain other liabilities of the Sellers.

Purchaser, in making this offer, has relied on representations by the Debtors that the Debtors would seek the Court’s approval of (i) a fee of $1,000,000 (the ‘Break-Up Fee’), which is less than 3% of the aggregate Purchase Price, and (ii) Purchaser’s reasonable fees, costs and expenses…not to exceed in the aggregate $500,000 (the ‘Expense Reimbursement,’ and, together with the Break-Up Fee, the ‘Bid Protections’)…all payable upon the earlier of the closing of an Alternative Transaction or Restructuring Transaction (each as defined in the Asset Purchase Agreement) and 20 days after approval of an Alternative Transaction or Restructuring Transaction.

A Sale is the only viable option that will enable the Debtors to preserve the value of their assets, maintain their business operations for the benefit of vendors and service providers, and preserve jobs for many employees. Accordingly, the Motion should be granted, entry into the Asset Purchase Agreement with the Purchaser should be approved, the Bidding Protections should be approved, the Debtors should be authorized to implement the fair and reasonable Bidding Procedures to obtain the highest or otherwise best offer for the Debtors’ assets, and any resulting Sale in accordance with the Bidding Procedures should be approved.”

Prepetition Indebtedness

The Debtors are party to a “Prepetition First Lien Credit Agreement” with Aquiline (as successor to Bank of America, N.A.) as Administrative Agent and Collateral Agent, and certain lenders identified therein (the "Prepetition First Lien Lenders') and which consists of a revolving commitment in the aggregate of up to $17.0mn and a term loan commitment in the aggregate of up to $53.0mn as well as certain letters of credit. Aquiline purchased the entirety of the debt outstanding under these facilities on October 30, 2020.

As of the Petition date, the Debtors owe not less than $64,686,197 under the Prepetition First Lien Credit Agreement including (i) $14,030,000 in principal amount of revolving loans, (ii) approximately $49,356,250 in principal amounts of term loans and (iii) approximately $1,299,947 of interest.

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