Stalking-Horse Bid

A stalking-horse bid is an initial offer on the assets of a bankrupt or distressed company that sets the minimum price for subsequent bids. The bankrupt company selects a bidder to make the opening offer; that bid becomes the floor at which an auction for the assets begins. The process is typically overseen and approved by a bankruptcy court.

How it works

• The distressed company chooses a stalking-horse bidder and negotiates an asset purchase agreement.
• The stalking-horse bid is filed with the bankruptcy court and approved, establishing a minimum (floor) bid.
• The assets are opened to competing bidders in an auction. Competing bids must exceed the stalking-horse offer.
• If a higher bid wins, the stalking-horse bidder often receives protections such as breakup fees and expense reimbursement.

Stalking-horse bidders can usually specify which assets and liabilities they will acquire and may negotiate terms that discourage low or opportunistic competing bids.

Advantages

For the bankrupt company:
* Prevents lowball offers by establishing a credible floor price.
* Encourages competitive bidding to potentially increase sale proceeds.

For the stalking-horse bidder:
* Opportunity to negotiate favorable purchase terms and choose specific assets/liabilities.
* Often receives breakup fees, expense reimbursement, and sometimes bidding protections (topping fees or bid increments).

Disadvantages and risks

For the stalking-horse bidder:
* Must invest time and resources in due diligence before the auction.
* Publicizing the bid and diligence findings can enable competitors to submit slightly higher offers and win.
* Negotiation and overhead costs can be substantial; the bidder may overpay if valuation is wrong.

For the estate:
* If protections are generous, the estate may pay significant breakup or topping fees even if a higher offer emerges.

Key legal terms

• Breakup fee: A fixed amount paid to the stalking-horse bidder if it loses to a higher bidder.
• Topping fee: A percentage or amount paid based on the difference between the winning bid and the stalking-horse bid.
• Court approval: Stalking-horse agreements and related fees typically require bankruptcy court approval and are legally enforceable once approved.

Examples

• Bed Bath & Beyond / Overstock.com (2023) — Overstock was selected as a stalking-horse bidder for certain digital assets and intellectual property, bidding roughly $21.5 million. The assets went to auction; Overstock prevailed and relaunched the brand’s website. Other asset sales (leases, certain brand assets) were sold to different buyers.
• Dendreon / Valeant (2015) — Valeant entered as stalking-horse bidder with an initial $296 million cash offer; bidding competition raised the price. The court-approved sale ultimately closed at a higher amount (reported around $495 million), with the stalking-horse bidder entitled to breakup and expense protections during the process.

FAQs

Q: Is a stalking-horse bid legally binding?
A: Yes—once approved by the bankruptcy court, the stalking-horse purchase agreement and associated protections are enforceable.

Q: Why accept a stalking-horse bid?
A: It sets a credible starting price, discourages low offers, and can stimulate competitive bidding that increases recovery for creditors.

Q: How does a stalking-horse bidder protect itself?
A: By negotiating breakup fees, expense reimbursement, bidding protections, and by carefully conducting due diligence before committing.

Bottom line

A stalking-horse bid is a strategic tool in bankruptcy sales that protects the estate from low bids and generates competitive auctions. It benefits both the seller (by establishing a baseline value) and the initial bidder (through negotiated protections), but it requires careful due diligence and can expose the stalking-horse bidder to the risk of being outbid after incurring substantial costs.