What is a stalking horse bidder?

A stalking horse bidder is an initial bidder or purchaser on the sale of a distressed or bankrupt company's assets. The initial bidder negotiates a purchase agreement with the debtor, conducts due diligence on the assets, and sets the terms of the transaction.

In short, in the sale of distressed assets, stalking horse bidder is explained as the first bidder who lays the groundwork for subsequent bidders. 

The stalking horse bidder will determine the purchase price floor for other interested parties to make a bid. To prevent other potential bidders from underbidding the purchase price, the stalking-horse bidder will set the price at the low end of the bidding range.

The stalking horse bid's primary goal is to prevent the insolvent company from receiving low final bids for its assets.

The definition of a "stalking horse bidder" refers to an old hunting technique where the hunter would move closer to his prey while hiding behind either a real horse or a cutout image of a horse. 

The bankruptcy process, however, in which the stalking horse bidder is involved, is far from concealed. Bankruptcy proceedings are open to the public. The potential purchaser or bidder must disclose more information about the deal and themselves than is required in private transactions.

Key points

Stalking horse bidder explained

To understand what a stalking horse bidder means, we should learn why it is needed in a bankruptcy sale process. 

In the sale of assets during bankruptcy proceedings, the debtor has the obligation to secure the highest and best value for any assets. 

According to Dallas-based law firm Jones Day, potential bidders or purchasers find this obligation unfavourable because such transactions typically take longer to complete and require a bankruptcy court approval, including the risk of facing objections on the sale.

There are also uncertainties that come with the auction process, which is required to maximise the value of the distressed assets. 

According to Jones Day: “Sales pursuant to a plan of reorganisation involve even more potential obstacles and longer periods of time, as they are subject to the confirmation of a plan of reorganisation, which can be a lengthy and uncertain process.” This is where the stalking horse bidder steps in.  

How does a stalking horse bidder work?

The process begins when a company intends to declare bankruptcy. The distressed company will select a party from a group of interested buyers to make the initial bid to purchase its assets.

The stalking horse bidder submits the initial offer price in the form of an asset purchase agreement. The agreement will also include the stalking horse bidder's terms and proposed incentives. 

When the debtor and the stalking horse bidder reach an agreement and finalise it, it is presented to a court for approval of the sale process, bidding procedures and incentives.  

The stalking horse bidder's offer price will be the floor price for other potential bidders. Other potential buyers must submit bids that are higher than the floor price. As a result, the insolvent company that employs the stalking-horse is more likely to obtain higher bids at auction.

Stalking horse bidder examples  

One of the most famous examples is the bankruptcy case of Weinstein Co., a film studio company founded by brothers Harvey Weinstein and Robert Weinstein. 

In 2018, Weinstein Co. filed a bankruptcy petition following Harvey Weinstein’s case of sexual misconduct. The company lined up several stalking horse bidders, and picked Dallas-headquartered private equity firm, Lantern Asset Management, as the winner. 

Lantern Asset Management acquired Weinstein Co. in a $400m plus deal.

Risks of a stalking horse bidder

Stepping in as a stalking horse bidder comes with a number of risks, especially since the bankruptcy proceedings are open to the public. According to Jones Day, one of the most likely risks is that the stalking horse bid deal, including the agreed incentives, is made public before the court approves it. 

In this case, another potential bidder could raise an offer for the debtor's assets based on the results of the stalking horse bidder's due diligence. Another possibility is that other prospective buyers agree to buy the debtor's assets under the terms of the stalking bidder without paying compensation. 

For these risks and for putting the highest initial bid, the stalking-horse bidder receives incentives, such as expense reimbursement and break-up fees. The expense reimbursement fee compensates the stalking horse bidder for the costs incurred from negotiating the deal, such as financial advisers and legal fees. 

The break-up fee is the additional compensation paid to stalking horse bidders for setting up the floor price. It’s a kind of protection if they are outbid during the auction. The rule of thumb for the break-up fee is up to 3% of the purchase price. The court must approve the break-up fee.

Final thoughts

The stalking horse bidder helps an insolvent company avoid lengthy bankruptcy proceedings and achieve the highest bidding price for its assets. However, there is always the risk that the stalking horse bidder is beaten by other prospective buyers, as the bankruptcy proceedings are made public.

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