Buying a business out of bankruptcy is a risky proposition, but it could earn outsized returns. 

Should your company look to acquire the operations or assets of a distressed company? With Chapter 11 filings decelerating but still high relative to where they were three years ago, bargains could await.

This week, SSI Group Holding filed Chapter 11 for the second time in six years. Seafood-restaurant operator Captain D's LLC became a "stalking-horse" bidder for Grandy's restaurants, a brand that is part of SSI Group's portfolio. The proposed $6 million transaction does involve a financial sponsor — but it shows that companies are trolling for distressed assets.

"You don't have to be a hedge fund to do this," says one New York-based corporate-restructuring attorney. "Oftentimes strategic investors come to us to talk about becoming a bidder, or part of a syndicate of bidders, for a competitor that is failing."

Buying assets from a seller that's in bankruptcy — a so-called Section 363 sale — has numerous advantages. The buyer purchases only the assets it wants, and those assets are free and clear of any titles. A buyer can also designate which contracts and leases it wants to assume; other liabilities and costs go away. And the asset probably comes at a distressed price.  

On top of that, being the stalking-horse in a 363 sale — the interested buyer chosen by the bankrupt company to make the first bid — offers "serious advantages," says Jonathan Carson, managing director of Kurtzman Carson Consultants, a claims and noticing agent.

The stalking-horse bidder negotiates transaction terms that establish a baseline for all other bidders. If another buyer wins the auction, the stalking-horse bidder can get breakup fees and reimbursement of expenses, such as costs for due diligence. In the Grandy's sale, for example, the purchase agreement calls for stalking horse Captain D's to get a $100,000 breakup fee and $200,000 for expense reimbursement.

Of course, the bankruptcy court has to bless the deal's terms and the auction's outcome, which can take months.

Potential takeover targets for buyers include their suppliers and competitors, says Jacen Dinoff, chief executive of turnaround firm KCP Advisory Group. In some cases, suppliers might approach the buyer prebankruptcy, asking it to purchase a portion of the company to keep it in business.

The caveat to any transaction of distressed assets: due diligence is not going to catch all of the legacy issues that exist in the purchased business, so the buyer needs executives skilled in corporate turnarounds to make the acquisition work. Tuning up and integrating a distressed business can take a lot of management's time — even more than a typical merger.

And buyers never know who is going to come out of the woodwork at the last minute to contest a sale. Last week, a borrower who had defaulted on a loan from Anglo Irish Bank sued the Irish financial institution when it tried to sell a $9.5 billion loan portfolio to Dallas-based Loan Star Funds. The borrower says the loan agreement requires Anglo Irish to retain a 51% ownership interest in the note.

Potential problems such as these are why some experts counsel corporates to stay away from distressed assets altogether. "Strategic buyers usually don't like to do this," says Mike Green, chief executive of Tenex Capital Management. "And those that do don't do it a second time — it's a defocusing event."

Bankruptcy | September 16, 2011 | CFO.com | US

Vincent Ryan

The brand size and strength of the nation and its companies are in a free fall, a leading brand-valuation firm says.

Looking at the United States as a brand, how much is that intangible asset worth? According to one educated guess, $1.2 trillion less than it was five months ago.

That's from U.K.-based Brand Finance, which claims to be the world's largest brand-valuation service. Corporate customers use the firm to calculate the worth of their branded businesses, to provide insight on how to allocate resources so as to best grow such businesses, and to value the intangible assets of acquisitions.

Brand Finance also rates the value of "national brands," or the total worth of all branded products and services from companies based in each country, including an incremental amount attached to being from a certain country. Brand USA, which was valued at $12.6 trillion in April of this year, plummeted to $11.4 trillion as of September 1.

The measurement uses data from the Organization of Economic Cooperation Development, the World Economic Forum, and Swiss business school IMD. The valuation also takes into account national gross domestic product, broken down by primary revenue sources (agriculture and other commodities), secondary sources (manufacturing), and tertiary sources (services). The number crunching produces an estimated royalty that would have to be paid to the country, plus royalties to each branded business, in order to license their brands, and applies those royalties to present and future revenues in order to arrive at a net present value.

That is a size measurement, but Brand Finance separately rates the strength of each national brand, which factors in the country's infrastructure (including education, in addition to traditional elements like roads and bridges), brand equity (a measure based on market research), and economic growth.

While U.S. brand value remains approximately four times the size of its closest trailers, Germany and China, its brand strength has spiraled from 5th a few years ago all the way to 17th, hampered by inflation, cost of capital, reduced volume of capital, higher unemployment, and declining image abroad.

As to the latter, Brand Finance CEO David Haigh says: "As a Brit, I hesitate to go around criticizing America. But the fact is that a number of unfortunate foreign-policy decisions, the economic crises, Enron [and the other corporate scandals], the banking crisis, and now the debt downgrade have not helped people's perceptions of America. Anyone who underestimates America is a fool, and it probably will rebound. But the last few years, it's been on a downward track."

Of Standard & Poor's downgrade of U.S. debt, Haigh opines that it should have come long ago. "I mean, they do owe $14 trillion," he notes.

The United States is not the only country on a downward track, though. Brand Finance calculates that this year's renewed economic crisis has caused the value of intangible assets worldwide to sag by $6.2 trillion since January.

Meanwhile, in the firm's newest assessment of the brand value owned by individual companies worldwide, Apple has streaked to second place, from 20th in January 2010 and 8th as recently as January of this year. The ranking is volatile overall. For example, Wal-Mart has fallen from first to fifth over the past 20 months, opening the door for Google to take the top slot. And just since January, Bank of America has sunk from 6th to 14th, with HSBC taking over as the strongest bank brand, in the 10th position.

Other companies in the current top 10 include Microsoft, IBM, Vodafone, General Electric, Toyota, and AT&T.

The Economy | September 01, 2011 | CFO.com | US

David McCann