Stalking Horse Bid

A stalking horse bid is an initial bid or proposal made by a potential buyer for the assets of a financially distressed company, typically one in bankruptcy or under bankruptcy protection. This bid aims to set a minimum or baseline price for the sold assets and initiate a competitive bidding process.

The stalking horse bidder plays a crucial role in setting the initial benchmark for the asset's value while protecting it in case they don't win the final bid. This process can benefit the distressed company and potential buyers by maximizing the asset's sale price. Hence, this bid serves as a minimum or floor price for the assets.

• A "stalking horse bid" is used in business and bankruptcy contexts. It refers to an initial bid made on the assets of a bankrupt or financially distressed company. This initial bid sets a baseline price for those assets when auctioning them.
• In bankruptcy proceedings, stakeholders often employ the stalking horse bid strategy to guarantee a fair and competitive sale of assets from a distressed company.
• They help maximize the value of the bankrupt company's assets, which benefits creditors and stakeholders seeking to recover their investments.

A stalking horse bid is a strategic financial maneuver used in the context of bankruptcy proceedings or business acquisitions. The term "stalking horse" comes from the hunting practice of using a horse to hide a hunter's approach to prey.

Here's how the stalking bid process works:

• The process begins when a financially distressed company, often in bankruptcy, sells its assets to address its financial difficulties. However, before any sale can proceed, the company must obtain consent from the bankruptcy court.
• Once the bankruptcy court grants permission for the sale, the company, known as the debtor, takes a crucial step. It enters into a binding stalking-horse bid agreement with an initial interested buyer. Moreover, this agreement is pivotal in setting the stage for the asset sale.
• Furthermore, the bidder negotiates with the distressed company to agree on the terms of their initial bid. These terms include the purchase price, the specific assets included in the sale, and other conditions.
• Once the terms are finalized, the bidder publicly announces their bid. This bid serves as a starting point, setting a minimum or floor price for the assets.
• In the formal auction process, the sale of assets is initiated. If the auction receives bids lower than the stalking horse's bid or fails to attract any other bids, the stalking horse is usually declared the winner. In this case, the stalking-horse bidder moves forward with the purchase at the established price.
• However, if higher bids emerge during the auction, the debtor can select the request that offers the highest asset price.

Besides, the stalking horse bid protections are typically subject to negotiation between the stalking horse bidder and the parties involved in the sale, including the bankruptcy court, the bankrupt company, and any other relevant stakeholders.

The bidding procedure for a stalking-horse bid is a critical element of the asset sale process, and it often provides advantages to the stalking-horse bidder. Here's a breakdown of how the bidding procedure typically works:

• Initiation of the Sale Process: The distressed company, often in bankruptcy or facing financial distress, decides to sell its assets.
• Seeking Stalking Horse Bidders: Potential stalking horse bidders are identified and approached. These bidders can be outside investors, competitors, or other interested parties.
• Setting the Stalking Horse Bid Deadline: They establish and publicly announce the stalking horse bid deadline. Hence, this date marks the cutoff for potential bidders to submit their initial bids. 
• Stalking Horse Bid Submission: Before the deadline, potential bidders formally submit their bids or offers to the distressed company or its representatives. These bids are often kept confidential until the deadline has passed.
• Evaluation of Bids: After the deadline, the distressed company, its advisors, and possibly the bankruptcy court review the stalking horse bids.
• Acceptance or Rejection: If deemed acceptable, this bid establishes the baseline price for the assets and the sale process proceeds. If they reject the bid, they may continue the sale process with other potential bidders or make necessary adjustments.
• Auction Process: Once the stalking horse bid is accepted, a formal auction process is typically initiated.
• Competing Bids: Interested buyers submit their offers during the auction. These bids must meet certain conditions, such as exceeding the stalking horse bid by a specified amount and complying with the rules set by the bankruptcy court or other relevant authorities.

Therefore, this bid and subsequent auction process are designed to maximize the value of the distressed assets while providing a fair and competitive environment for potential buyers.

Let us look at stalking horse bid examples to understand the concept better-

Example #1

Imagine a struggling manufacturing company, MarverMed Manufacturing Inc., facing bankruptcy. The company's assets, including its factory, equipment, and inventory, will be sold to repay creditors. Moreover, Acon Investment, a private equity firm, expressed interest in acquiring MarverMed's assets. The investment firm negotiates with the firm and agrees to submit a stalking horse bid of $10 million, with the condition that they will assume certain outstanding liabilities and offer a break-up fee of $500,000 if their bid is outbid.

Hence, this bid is publicly disclosed as the baseline price. Subsequently, other potential buyers, such as competitors and investment groups, participate in an auction, with bids required to exceed Acon Investment's $10 million offer. This competitive process ultimately results in a winning bid of $12 million from another party, ensuring that the firm's assets are sold at the best possible price while providing safeguards for the investment company's participation.

Example #2

Virgin Orbit, the bankrupt  satellite launch company founded by billionaire Richard Branson, has entered a "stalking horse" agreement with Stratolaunch to sell its aircraft assets, including the "Cosmic Girl" carrier aircraft, for $17 million in cash. A stalking horse bid is an initial bid that other potential buyers must surpass to acquire the assets.

The bankruptcy marketing process has garnered interest in assets beyond carrier aircraft, with bids for all assets due by noon ET on May 19. Virgin Orbit, which split from Virgin Galactic in 2017, filed for Chapter 11 bankruptcy protection due to funding challenges following a failed satellite launch in January. Stratolaunch, founded by the late billionaire Paul Allen, specializes in air-launch-to-orbit rockets and hypersonic vehicles.

Here are the main advantages and disadvantages of stalking horse bid:

Advantages

• Price Benchmark: This bid establishes a baseline or floor price for the sold assets. Therefore, this ensures that the selling party, often in financial distress, receives a fair and reasonable value for their assets.
• Competitive process: They encourage competition among potential buyers. When other bidders need to surpass the bid, it can lead to higher offers, maximizing the seller's return.
• Speed and efficiency: These bids expedite the sale process by providing a ready-made offer. Hence, this can be particularly useful in bankruptcy cases or distressed asset sales where time is of the essence.
• Minimizing risk: They reduce the risk of low-ball offers or undervaluation of assets, as this bid represents a serious and credible offer from an established buyer.
• Transparency: These bids provide clarity in the sale process. All interested parties have access to the initial offer, helping to build confidence in the transaction's fairness.

Disadvantages

• Limited competition: These bids can deter some potential buyers from participating in the bidding process, as they may perceive it as a barrier to entry, leading to fewer competing offers.
• Undervaluation: There's a risk that the stalking horse bid might undervalue the assets, especially if the initial bidder has insider information or a stronger negotiating position.
• Negotiation leverage: This bidder can have significant negotiating leverage, potentially resulting in terms and conditions that are more favorable to them and less so for the seller.
• Failed negotiations: If negotiations with the bidder break down, it can disrupt the entire sale process, causing delays and uncertainty.
• Perception of unfairness: Other potential buyers may perceive stalking horse arrangements as unfair or biased, potentially leading to disputes or legal challenges.

This article has been a guide to what is Stalking Horse Bid. Here, we explain its examples, procedure in bankruptcy, advantages and disadvantages. You may also find some useful articles here -

• 363 Sale
• Normal-Course Issuer Bid
• Takeover Bid