Stalking Horse Finance

A "stalking horse" bid is a strategic initial bid in an auction or bankruptcy sale. It's designed to set a floor price and terms for other potential bidders, encouraging them to participate and potentially drive the final sale price higher.

The stalking horse bidder, typically a party interested in acquiring the assets of a distressed company, enters into an agreement with the seller (often a company in bankruptcy) to make an initial offer. This offer is then presented to the court and becomes the starting point for the auction process.

Benefits for the Seller (Debtor):

• Guaranteed Sale: The stalking horse bid provides a baseline offer, ensuring that the assets will be sold at a minimum price, even if no other bidders emerge. This is crucial for companies in bankruptcy, where maximizing asset value is vital for repaying creditors.
• Streamlined Process: The stalking horse bidder works with the seller to establish due diligence, documentation, and a purchase agreement. This pre-negotiation simplifies the auction process and accelerates the timeline.
• Attractive Terms: The stalking horse bidder often agrees to terms that are favorable to the seller, making the offer more appealing to the court and creditors.

Benefits for the Stalking Horse Bidder:

• Break-Up Fee: To compensate the stalking horse bidder for their time, effort, and legal expenses in setting up the initial offer, they typically receive a "break-up fee" if their bid is ultimately outbid. This fee, usually a percentage of the bid amount, covers their costs and provides an incentive to participate.
• Expense Reimbursement: In addition to the break-up fee, the stalking horse bidder may also be reimbursed for certain expenses incurred during the due diligence and negotiation process.
• Bidding Protections: The stalking horse agreement may include bidding protections, such as a "minimum overbid" requirement, which forces competing bidders to make significantly higher offers to win the auction.
• Inside Track: The stalking horse bidder has early access to information and a significant head start in the bidding process, allowing them to thoroughly assess the assets and develop a well-informed strategy.

Risks for the Stalking Horse Bidder:

• Outbid: The primary risk is being outbid at auction. While the break-up fee helps mitigate losses, the bidder still loses the opportunity to acquire the assets.
• Due Diligence Costs: Conducting thorough due diligence can be expensive, and the stalking horse bidder bears these costs upfront.
• Deal Fail Risk: While rare, the proposed sale can still fall through due to unforeseen circumstances, even with a stalking horse bid in place.

In summary, stalking horse bids are a valuable tool in bankruptcy and asset sales, providing a framework for maximizing value and ensuring a smoother transaction process. They offer advantages for both the seller and the initial bidder, although each party must carefully weigh the associated risks and benefits.