Stalking-Horse Bid

What is a 'Stalking-Horse Bid'

A stalking-horse bid is an initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid.

This method allows the distressed company to avoid low bids on its assets. Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company's assets. In essence, the stalking horse sets the bar so that other bidders can't low-ball the purchase price.

BREAKING DOWN 'Stalking-Horse Bid'

The term originates from a hunter trying to conceal himself behind either a real or fake horse. Bankruptcy proceedings are open, and more information about the potential deal and the purchaser will be disclosed than in a non-public deal.

Advantages of a Stalking-Horse Bid

A stalking-horse bidder is typically given incentives, since this is the opening offer for the assets or company. To make it more attractive to place a bid, expense reimbursements, breakup fees and exclusivity for a certain period of time may be included. Typically, these have to be approved by the bankruptcy court.

Disadvantage of a Stalking-Horse Bid

As the first bidder, the stalking-horse bidder puts in a great deal of effort. The bidder must perform due diligence, which is more challenging since this is the initial bid; other prices cannot be used as a gauge. There is a risk that the stalking-horse bid is made public, and another party comes in to make a higher offer, using the due diligence of the stalking-horse bidder as a starting point to save time and effort. Negotiating the deal may also take more time, since it is the initial offer.

Example

Valeant Pharmaceuticals International Inc. (NYSE: VRX) placed a stalking-horse bid for certain assets of bankrupt Dendreon. The initial offer was $296 million in cash on Jan. 29, 2015. However, due to competition from other parties, the offer was raised to $400 million about a week later.

At a bankruptcy hearing, the court formally approved Valeant's role as a stalking horse bidder. The company was entitled to receive a breakup fee and expense reimbursement if its bid was unsuccessful. A time limit was given for parties to submit bids, with a deadline of Feb. 10, 2015, and an auction was to be held two days later.

Ultimately, later that month, the bankruptcy judge approved the sale to Valeant for $495 million, although the deal changed to include other assets.

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