Bankruptcy Auctions: The New Buyout Market?

The Following Was Jointly prepared by Goodwin Procter’s Private Equity and Financial Restructuring Practices:

In the current market, opportunistic PE firms may be able to capitalize on industry-
specific deal research and/or company-specific due diligence completed during the
boom to realize the value in strong operating companies’ financial statements
stressed under the weight of excess leverage and weakened consumer demand. The
auction process in this new world order may be in the form of sales pursuant to
Section 363 of the Federal Bankruptcy Code. In a 363 sale, a debtor in bankruptcy
can sell its assets, which constitute either substantially all of the debtor’s business or
discrete business units, in a transaction supervised and approved by the Bankruptcy
Court. The purchaser buys the identified assets free and clear of most creditors’
claims, with the ability to pick and choose which of the debtors contracts to assume
and often the leverage to renegotiate deals with suppliers and customers in the
process. While 363 sales involve a great deal of bankruptcy-regulated process,
including an auction process to assure that the debtor’s estate has maximized value,
sophisticated investors can construct sensible transactions to acquire fundamentally
sound businesses and, in certain cases, successfully structure the consideration
offered in their bid to include a mix of equity and debt securities with the effect of
leveraging the acquired business


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