Stalking-Horse Bid

What is a Stalking-Horse Bid?

In bankruptcy cases, a stalking-horse bid refers to a deal with a potential buyer that is hidden from the public, creditors, and the courts. Usually, when a company is preparing to file bankruptcy, it chooses an entity from a pool of interested bidders to make the first bid to buy the company’s assets. The selected bidder sets the pace for other bidders, such that other bidders cannot bid below the purchase price.

The term “stalking horse” is borrowed from hunters, and it was used to describe a scenario when hunters would hide behind their horses as they moved closer to the prey.

A bankrupt company can achieve an effective restructuring of its financial assets by selling a majority of its assets. Therefore, the company uses a stalking-horse bid to ensure it gets higher bids at the auction. The stalking bid becomes the highest initial bid, setting the floor price that other bidders cannot underbid.

In return for offering the highest initial bid, the stalking-horse bidder gets various incentives, such as breakup fees and expense reimbursements. The incentives can help the company get a better initial offer before the auction occurs.

How a Stalking-Horse Bid Works

Before selling the assets through an auction, the debtor must first get consent from the bankruptcy court to initiate the sale. Once the bankruptcy court approves the auction, the debtor enters into a binding stalking-horse agreement with the first interested buyer who sets the floor price for other bidders. The first bidder secures the opportunity to perform due diligence on the debtor and its assets to determine if it’s a viable deal and the best price to pay for the assets.

Depending on the bids received in the auction, the stalking horse will be considered the winner if the bids received are below the stalking-horse bid or if there are no bids received. However, if there are higher bids at the auction, the debtor can choose the bid that offers the highest price for the assets. In such a scenario, the debtor may offer the stalking-horse bidder a negotiated breakup fee to compensate them for the losses incurred in the auction process, usually 1% to 3% of the final purchase price.

Bidding Procedure for a Stalking-Horse Bid

Most of the time, bidding procedures give the stalking-horse bidder an added advantage over other bidders at an auction. While the creditor committee, appointed trustee, and the court may object to certain terms of the bidding procedures, a stalking-horse bidder can make the bidding process favorable to itself.

It can influence some of the components of the bidding process to its advantage, and other bidders who participate in the process will need to follow the guidelines. The bidders must also provide proof of their financial ability and deliver a good faith deposit.

When negotiating bidding procedures, the stalking-horse bidder can negotiate terms that deter competing bidders from offering lower bids than what is already submitted to the debtor. Some of the aspects which the stalking bidder may influence include:

• Minimum overbid amounts
• Dividing assets into bid lots
• Bidding process timelines
• When a bid is qualified for participation
• Whether the auction is silent or open
• Whether competing bids are disclosed to the stalking-horse bidder

Advantages of Stalking-Horse Bids

1. Leverage over other bidders

The stalking horse gets the opportunity to negotiate the sale terms, i.e. legal and financial terms, compared to other bidders who get into an agreement that is already negotiated with another party. The stalking horse bidder can choose the specific assets and liabilities it wants to acquire, and negotiate representations and warranties, as well as the termination of the agreement.

2. Opportunity to conduct due diligence

As the first bidder, the stalking-horse bidder gets the opportunity to conduct due diligence ahead of other competing bidders. The stalking horse gets a chance to review the company’s financial records, talk to the management and employees, and apply for any regulatory approval where required. Such an opportunity also allows them to engage creditors, vendors, and large customers to ensure they approve the offer.

3. Bidding protection

The stalking-horse bidder benefits from bidding protection for costs incurred as the first bidder. It can receive a breakup fee and expense reimbursements for costs incurred to hire legal and financial advisors, conduct due diligence, and other expenses incurred before the auction becomes public. The costs are reimbursed by the debtor and the bankruptcy estate, but subject to the approval of the bankruptcy court.

Limitations of Stalking-Horse Bids

1. Risk of taking less valuable assets

By agreeing to set the floor price, the stalking-horse bidder agrees to purchase the debtor’s assets, even if the value of the assets falls below the purchase price during the auction process. As long the bankruptcy court approved the stalking horse agreement, the agreement is binding to all parties, and it will be difficult to renegotiate or recede on the agreement.

2. The stalking-horse bid may lose at the auction

The stalking horse sets the floor price for other bidders in an auction. However, competing bidders may outbid the initial bid, and the stalking horse may miss out on the acquisition. However, the stalking horse will still get a reimbursement of the costs incurred in the process, subject to the bankruptcy court’s approval.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA®) certification program, designed to help anyone become a world-class financial analyst. Our mission is to help you advance your career, and with that goal in mind, the additional resources below will be a big help:

• Chapter 11 Bankruptcy
• Go Shop Period
• Hostile Bid
• Types of Due Diligence
• See all valuation resources