Definition, How It Works, Example

What Is a Stalking Horse Bid?

A stalking horse bid is an preliminary bid on the property of a bankrupt firm. The bankrupt firm will select an entity from a pool of bidders who will make the primary bid on the agency’s remaining property. The stalking horse units the low-end bidding bar in order that different bidders can’t underbid the acquisition value. The time period “stalking horse” originates from a hunter making an attempt to hide himself behind both an actual or pretend horse.

Key Takeaways

  • A stalking horse bid is an preliminary bid on the property of a bankrupt firm, setting the low-end bidding bar in order that different bidders can’t underbid the acquisition value. 
  • Different consumers can submit competing gives following the stalking horse bid. 
  • A stalking horse bidder is afforded varied incentives, akin to expense reimbursements and breakup charges.

How a Stalking Horse Bid Works

The stalking horse bid methodology permits a distressed firm to keep away from receiving low bids because it sells its last property. As soon as the stalking horse bidder has made its provide, different potential consumers might submit competing bids for the corporate’s property.

By setting the low finish of the bidding vary, the bankrupt firm hopes to appreciate the next revenue on its property. As chapter proceedings are public, they permit for the disclosure of extra details about the deal and the customer than can be out there in a personal deal.

Benefits of a Stalking Horse Bid

Because the stalking horse bid is the opening provide for the property or firm, the bankrupt firm usually awards a number of incentives to the stalking horse bidder. These embody expense reimbursements, breakup charges, and exclusivity for a specified interval.

The stalking horse bidder additionally receives advantages for its efforts. It might negotiate the phrases of the acquisition, select which property and liabilities it needs to amass, and determine which executory contracts it’s prepared to treatment and have acquired. Most essential, the stalking horse bidder can negotiate bidding choices that discourage opponents from bidding.

Disadvantages of a Stalking Horse Bid

The stalking horse bidder will exert nice effort to realize some great benefits of being the primary bidder. As that is the opening bid, the stalking horse bidder should carry out due diligence (DD) when figuring out its provide value and the truthful worth of the remaining property. The stalking horse bidder should make investments time and sources to do that analysis. The danger stays, nevertheless, that even with due diligence the value bid could also be greater than the worth of the property. 

Moreover, there may be danger related to the stalking horse’s bid being public. One other occasion can merely put together and submit a barely larger provide, permitting it to capitalize on the stalking horse’s due diligence. Additionally, the stalking horse bidder might spend a superb little bit of time in negotiating the phrases of the deal, which can additional elevate overhead prices.

Instance of a Stalking Horse

In response to reporting by Cision PR Newswire, Valeant Prescription drugs Worldwide Inc. (NYSE: VRX) positioned a stalking horse bid for sure property of bankrupt Dendreon. The preliminary provide was $296 million in money on Jan. 29, 2015. Nevertheless, as a result of different aggressive bids, the value elevated to $400 million one week later.

At a chapter listening to on Fri., Feb. 20, 2015, the court docket formally accredited Valeant’s position as a stalking horse bidder. The corporate was entitled to obtain a breakup charge and expense reimbursement if its bid was unsuccessful. The court docket additionally set a deadline for added bids. Finally, the chapter decide accredited the sale to Valeant for $495 million, with a brand new deal together with different property, in accordance with reporting by the Wall Road Journal.

Is a Stalking Horse Bid Legally Binding?

Sure. As a stalking horse bid have to be accredited by a chapter court docket, it’s legally binding.

What Is a Topping Price?

A topping charge is a proportion of the distinction between the successful bid and the stalking horse bid that have to be paid to the stalking horse bidder. This differentiates it from a breakup charge, which is a set quantity.

What Is a Stalking Horse Candidate?

In politics, a stalking horse candidate is a sham candidate put ahead to hide one other candidate or to divide the opposition. In a chapter continuing, a stalking horse candidate is an purchaser of the bankrupt firm that’s chosen by the corporate and put ahead for approval by the chapter court docket. By being allowed to set the preliminary bid, which different bidders can’t go under, it does in a way divide the opposition by maybe making it much less doubtless that they are going to bid in any respect in the event that they contemplate the preliminary bid too excessive.

The Backside Line

A stalking horse is chosen by a bankrupt firm to place in an preliminary bid on its property. The chapter court docket should approve the selection and the bid. The property are then opened as much as different bidders, who should make the next bid with a purpose to achieve acquisition of mentioned property. Being a stalking horse bidder has its perks, which embody having management of many facets of the bidding state of affairs and fail-safe charges within the occasion that its bid doesn’t win. Nevertheless, the draw back is that the position comes with larger preliminary prices, incurred by in depth negotiations and conducting due diligence, upon which different bidders can then capitalize in making their bids.