Card-and-party-supply store Swoozie's has been sold at auction for $2 million more than a stalking horse bidder had offered for the bankrupt company.
At an auction held in a conference room at the offices of Swoozie's counsel, Alston & Bird, Northbrook-Ill.-based Hilco Merchant Resources in-house counsel Joseph A. Malfitano tendered the winning bid of $7,425,000 to purchase Atlanta-based Swoozie's.
Hayden Kepner Jr. of Scroggins & Williamson represented the stalking horse, Newton, Mass.-based Hudson Capital Partners, which had posted a starting bid of $5,435,000. The inventory, according to court records, was valued at about $18.4 million.
A stalking horse bidder is one chosen by a bankrupt company from a pool of contenders that—in exchange for some downside protections if it doesn't tender the winning bid—launches bidding on the asset at an agreed-upon starting price, effectively protecting the seller from lowball offers. Attorneys involved in the deal said that stalking horse bidders get outbid roughly 30 to 50 percent of the time.
Kepner said Hudson Capital got a breakup fee of $75,000 since it did not end up buying Swoozie's. He said he was surprised that his client didn't win the day, but he knew competition would be stiff because there were several other bidders—Gordon Brothers Group/Gordon Brothers Retail Partners and Great American Group, in addition to Hilco—all of which are major liquidators.
"There's not a lot of liquidations going on in a lot of retail chains, so you had a lot of competition for this one" simply because liquidators were looking for something to do, he said. "The price was significantly higher than we thought it would go. It's good for the creditors, but it doesn't do the debtor much good."
The company's largest secured creditor, Wells Fargo, is owed more than $3 million, Kepner said.
The winning liquidator, Hilco, on Tuesday launched "Going out of business" sales at 43 Swoozie's stores around the country. Five of those stores are in the Atlanta area. Under the terms of the agreement, Hilco may supplement Swoozie's existing inventory, but 75 percent of the new items must come from Swoozie's usual vendors.
During the auction, Kepner said, the bidders established specific bidding procedures and a bidding order and agreed to make bids in $100,000 increments. After that orderly beginning, he said, an auction becomes "pretty free flowing," with bidders attempting to tailor contract terms to their liking. In this auction, for example, his client wanted to purchase Swoozie's intellectual property—including its name and customer lists—and its lease designation rights. Winning bidder Hilco did not purchase those assets, which the court record indicates will be sold separately.
Kepner said the sale was structured essentially as an agency agreement. Hilco, he said, did not actually buy the inventory because it couldn't do so legally.
"The landlord is going to have all sorts of prohibitions on somebody else coming in and selling things other than the tenant," he said. "So legally they enter into an agency agreement where the liquidator acts as an agent for the tenant to sell the stuff, and they guarantee a certain fee, which conceptually is the same as buying all the inventory at a certain price, but technically they're not taking ownership of it."
If sales get above a certain level, he said, some of the proceeds will be shared with the debtor.
The auction process itself was a calm one, Kepner and Malfitano said, with Swoozie's financial adviser, Clear Thinking Group, running the process.
"There's not somebody who's standing up there doing the patter," Malfitano said. He said the auction got started at about noon and ended around 6 p.m. on March 25. U.S. Bankruptcy Judge C. Ray Mullins approved the sale on Tuesday.
Swoozie's counsel at the auction, Wendy R. Reiss of Alston & Bird, did not return calls seeking comment. The official committee of unsecured creditors was represented by Darryl S. Laddin of Arnall Golden Gregory.
The auction took place only 23 days after Swoozie's filed for Chapter 11 reorganization on March 2. John W. Mills III of Barnes & Thornburg, who did not attend the auction but served as outside counsel to winning bidder Hilco, said people have been asking him why the sale moved so quickly.
"Easter is coming, Mother's Day, Father's Day, high school and college graduations, weddings," he said, noting big sales opportunities for Swoozie's products. "That's what drove the sale and why it was done on this timetable."