RentPath Holdings, Inc. – Debtors Find Silver Lining in FTC’s Halt of CoStar Sale, Settles Break-Up Fee Litigation with CoStar with $52mn Settlement Set to Bolster First and Second Lien Lender Recoveries

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February 22, 2021 – The Debtors have requested Court approval of a stipulation reached with CoStar Group Inc("CoStar") to settle litigation in respect of $58.75mn break-up fee that the Debtors allege they are owed following the collapse of the Court-approved sale of the Debtors' assets to CoStar. The stipulation will see the Debtors receive 88.5% (or $52.0mn) of that amount (plus related interest accrued in an escrow account) and CoStar get the 11.5% balance.

The stipulation provides:"…CoStar and the Debtors shall deliver the joint written instructions…to Citibank N.A. (the “Escrow Agent”) directing the Escrow Agent to (a) release fifty-two million dollars and zero cents ($52,000,000.00) and 88.5% of any amounts in the Escrow Account above $58,750,000 to such account as designated in Joint Written Instruction and (b) release six million seven hundred and fifty thousand dollars and zero cents ($6,750,000.00) and 11.5% of any amounts in the Escrow Account above $58,750,000 to an account designated in writing (in email or otherwise) by CoStar to the Escrow Agent."

On June 10, 2020, the Court hearing the Debtors' cases confirmed the Debtors' Plan and approved the Plan's centerpiece, a $587.5mn sale of the Debtors' assets to CoStar. Then it all went wrong. At the end of November 2020, the FTC filed a complaint to halt the sale on antitrust grounds (temporary restraining order issued on December 4th) and at the end of December the Debtors notified CoStar of their termination of the CoStar asset purchase agreement. They also  asked the Court to compel CoStar to pay a $58.75mn break-up fee, arguing that the antitrust/regulatory/HSR risk had been clearly negotiated as falling to CoStar.

On February 19th, 2021, it became clear, however, that the FTC's restraining order had landed jam side up, with the Debtors filing an asset purchase agreement (the "APA") relating to a proposed $608.0mn sale of substantially all of their assets to Redfin Corporation ("Redfin," Nasdaq: RDFN). Redfin seemingly arrives with a higher purchase price and with lower transaction/antitrust risk (see further on Redfin below). Completing a dramatic turn of events, the Debtors have entered the bankruptcy history books as a rare recipient of a break-up fee…and a healthy one at that.

 A hearing on the motion is scheduled for March 3rd.

Stipulation Motion

The Debtors' motion provides: "On February 11, 2020 (and effective as of the Petition Date), the Debtors entered into an Asset Purchase Agreement by and among CSGP Holdings, LLC (the ‘Stalking Horse Bidder’), CoStar Group, Inc. (solely for purposes of section 5.13 thereof) (‘CoStar Group’ and, together with CSGP, CoStar’), and the Debtors for the sale of interests of the Debtor entity owning all or substantially all of the Debtors’ assets (together with all exhibits, appendices, supplements, documents, and agreements ancillary thereto, in each case as amended, supplemented, or modified from time to time, the “Stalking Horse APA”). The Stalking Horse APA contemplated an aggregate purchase price equal to $587.5 million in cash, plus certain assumed liabilities.

Ultimately, despite extensive efforts, including the Debtors’ incurrence of over $7 million in antitrust-related legal fees and expenses—on top of several additional months of chapter 11 costs due to the FTC Process prolonging the Debtors’ chapter 11 cases—the FTC determined that it would oppose the transaction with CoStar, commenced litigation to block the transaction, and obtained a temporary restraining order enjoining the parties from consummating the transaction. In light of the FTC’s opposition to the transaction, the parties faced months of litigation with the FTC and, at best, an uncertain outcome.

On December 29, 2020, the Debtors delivered a termination notice to CoStar (the ‘Company Termination Notice’), terminating the Stalking Horse APA under section 7.02(b) thereof and requesting that the Stalking Horse Bidder deliver to the escrow agent an executed joint written instruction to release the funds constituting the Break-Up Fee (as defined in the Stalking Horse APA, the ‘Break-Up Fee’) of $58.75 million to an account designated by the Debtors. 

Concurrently with their delivery of the Company Termination Notice to CoStar, the Debtors filed …(the ‘Motion to Enforce’), seeking, among other things, an order of the Court directing CoStar to promptly remit the Break-Up Fee.

On December 31, 2020, CoStar delivered a termination notice to the Debtors (the 'CoStar Termination Notice'), purporting to terminate the Stalking Horse APA on account of the Debtors’ alleged breach and asserting that the Debtors’ alleged termination of the Stalking Horse APA pursuant to the Company Termination Notice was ineffective. On January 4, 2021, CoStar filed a complaint (the “Complaint”) with the Court, which initiated an adversary proceeding (the “Adversary Proceeding”), petitioning the Court for a declaratory judgment that the Debtors’ alleged termination of the Stalking Horse APA pursuant to the Company Termination Notice was ineffective and, consequently, that the Debtors are not entitled to the Break-Up Fee and (ii) the Debtors’ breached the Stalking Horse APA and, as a result, CoStar’s purported termination of the Stalking Horse APA pursuant to the CoStar Termination Notice was proper.

On January 28, 2021, at an initial hearing to consider the Motion to Enforce, the Court set March 2–4, 2021 for the trial on both the Motion to Enforce and the Adversary Proceeding (collectively, the 'Break-Up Fee Litigation”). 

After completing extensive document production and commencing depositions, pursuant to the Scheduling Order, and with trial upcoming, the Debtors, CoStar, and the steering committee of the Crossholder Ad Hoc Committee (as defined in the Plan2) (the 'Steering Committee' and, collectively with the Debtors and CoStar, the 'Parties') agreed, subject to approval of the Court, to settle the Break-Up Fee Litigation, dismiss with prejudice the Adversary Proceeding, withdraw with prejudice the Motion to Enforce, and grant mutual releases and waive certain claims with respect to the Break-Up Fee Litigation, the Stalking Horse APA, and the Chapter 11 Cases." 

As to where the $52.0mn windfall will land, the Debtors' CEO provides [Docket No. 797]: "I further believe that the Stipulation is in the best interests of the Debtors’ creditors.  Under the Plan, the amounts received by the Debtors pursuant to the Stipulation will benefit Holders of Claims in Class 3 (First Lien Claims) and Class 4 (Second Lien Claims), increasing such creditors’ recoveries.  I am advised that the Steering Committee holds a significant proportion of the Claims in Class 3 (First Lien Claims) and Class 4 (Second Lien Claims).  I understand that the Steering Committee participated in negotiating, expressly agreed to the terms of, and is party to the Stipulation.  I likewise understand that all Holders of Claims in Class 3 (First Lien Claims) and Class 4 (Second Lien Claims) will benefit from the certainty provided by the Stipulation and the Debtors’ recovery of $52.0 million."

Redfin Sale

In a February 19th press release (also 8-K here) announcing the proposed acquisition, Redfin commented: "The acquisition will bring together a leading site for buying a home with a leading site for renting a home, giving anyone trying to move a complete view of her options. 

From the outset, Redfin and the Debtors are keeping a wary eye on the antitrust issues which doomed the CoStar sale; and making an effort to clearly differentiate both (i) their respective business markets, residential "sales" for Redfin and and residential "rentals" for the Debtors, with the parties not historically competing in each others non-overlapping markets; and (ii) the nature of the Redfin and CoStar transactions.

In its November 30, 2020 complaint, the FTC focused on the historically similar business operations of competitors CoStar and the Debtors, and the fact that the CoStar acquisition "would significantly increase concentration in the already highly concentrated markets for internet listing services advertising for large apartment complexes in 49 individual metropolitan areas across the United States…CoStar and RentPath have been each other’s closest rivals, competing to sell ILS advertising to property management companies and to attract prospective renters to use their ILS search services. CoStar and RentPath compete aggressively for website traffic from prospective renters and business from advertisers. Each has targeted the other with sales campaigns and significant discounts to win and retain advertising customers.   .

The Redfin press release continues: "The Boards of Directors of both companies have approved the transaction, which is subject to customary closing conditions, including antitrust approval and approval from a bankruptcy court. The closing of the transaction is not contingent on financing. Further details around closing will be forthcoming, at which time additional organizational and operational details will be announced.

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