This BLOG On What Is A Stalking Horse Offer And How Does It Work Was UPDATED And PUBLISHED On April 5th, 2020

The Stalking Horse Bid – “Pros & Cons”
Intro
An experienced real estate investor is probably familiar with the term “stalking horse” as it relates to bidding on and buying listed assets of a debtor currently in Chapter 11 bankruptcy.

• A stalking horse bid is essentially the first bid on a debtor’s assets in advance of any formal auction
• With a stalking horse bid, the bidder typically has the opportunity to perform its own internal due diligence on the asset(s)
• This is done while those who show up at the auction may not have the time to perform the same inspection of the asset being sold
• Bankruptcy courts require the debtor to sell assets to settle claims with creditors and to obtain the highest amount possible
• A stalking horse bid is one way the debtor can at least establish a “floor” of the assets as a way to avoid low ball bids at an auction and establish at minimum a satisfactory return

What Does Stalking Horse Mean?

A stalking horse is somewhat of a misnomer as it hints the potential buyer is hidden from the public, the courts, and creditors.

• The term is an old hunter’s term where the hunter would hide behind his horse while getting as close to the prey as possible
• During Chapter 11 proceedings, everything is approved by the court, including stalking horse bids

Here are some pros and cons of such a transaction from the perspective of the proposed buyer.

Pros Of Stalking Offer Bidders

Stalking horse bidders typically receive a form of a guarantee, called a break-up fee that will compensate the stalking horse bidder for some or all of the expenses the bidder incurred during due diligence.

• These expenses can include significant legal fees, ordering and paying for third-party appraisals to determine the current market value of the debtor’s assets
• In case the stalking horse is not ultimately the successful bidder and was outbid at the auction, a negotiated break-up fee can help compensate for some of the losses
• These fees can vary but a typical break-up fee can range from 1-3% of the final purchase price, but again any fee must be court-approved
• A stalking horse offer is in a better position to help craft any deal
• This can include specific assets the debtor owns, lien position of outstanding creditors and any contracts the debtor is under which may or may not be included in the sale
• This ability to establish an initial rule of the transaction is often used by the court and can even establish the bidding rules for the auction
• Getting there first means the stalking horse has the ability to favorably affect the outcome of the auction

Event Of Multiple Bidders On Stalking Bids

In the event there are no bidders at an auction, the stalking horse bid is awarded the assets listed in the agreement at the approved amount.

• Because a stalking horse bid is completely transparent
• Other potential bidders may see the existence of such a bid and decide to move on to another potential transaction and forego wasting any assets of its own to research the potential deal

Cons Of Stalking Horse

Just as being first can have its advantages so too can being first have some drawbacks.

• For example, if during the negotiations between the bidder and the debtor are not ultimately approved by the creditors’ committee or court Trustee, the agreement is void if successfully challenged
• A stalking horse bidder wants to acquire the desired assets at the lowest possible price but must also make an offer that is reasonable given the current circumstances

Stalking Horse Bids

Stalking horse bids are not always successful.

• The bidder expends time and talent evaluating the ideal offer that will secure the successful acquisition
• But even after research and independent asset appraisals the final value may later be determined to be lower than originally estimated
• For example, should there be an auction and no one shows up, the bidder is still required to pay the original amount, even if the final value proves lower
• Stalking horse bids can be outbid at an auction
• This means if the stalking horse bid is outbid at auction the bidder not only loses the opportunity to acquire the assets but only receives break-up fees and only those break-up fees approved by the court and creditors committee
• Any stalking horse bidder should be very clear at the outset that while there are advantages of being first there may also be disadvantages
• The Trustee will require all parties to follow the agreed-upon terms of any negotiations