Where Was Oldcastle Glass? USGNN.com™ Looks at Objections in Arch Aluminum Bankruptcy
January 13, 2010

In the "emergency motion" Oldcastle Glass filed last week in an attempt to become a bidder in today's auction for the sale of Arch Aluminum & Glass Co. Inc.'s assets (CLICK HERE for related story), Oldcastle Glass claimed that it was not "afforded fair and impartial treatment by the Debtors and their representatives" during the course of the bid process. Although the U.S. Bankruptcy Court Southern District of Florida later denied the motion, the questions raised by Oldcastle Glass were not addressed by that ruling.

USGNN.com™ spoke to Michael Collins with Jordan, Knauff & Co., an investment banking firm specializing in the door and window industry, but unconnected with the current case, for an insider's look at such proceedings.

In its emergency motion, Oldcastle Glass stated that although "Piper Jaffray [cited as Arch's investment bankers] 'engaged in an exhaustive marketing process prior to the filing of [the Debtors'] Chapter 11 cases to locate … potential purchasers for the Debtors' assets' and '[i]n total, 149 potential buyers were contacted,' Oldcastle Glass, a rather obvious candidate given its position as a significant participant in the same market segments where the Debtors are doing business, first became aware of the Debtors' assets sale the date the Debtors filed their bankruptcy petitions. The fact that a company that quite obviously has a significant ability to bring real value to the table as a strategic purchaser is being singled out for a differential treatment and additional bid obligations indicates that the process is flawed," the motion said.

But is a competitor of the bankrupt company an "obvious candidate?"

According to Collins, "Absolutely."

Collins explains that for many investment bankers looking to sell a company in a given industry, the first step is to compile a target list of buyers, typically starting with competitors.

"They are the obvious candidates because theoretically they're the ones that could immediately fold the company in. The customers of the company that's bankrupt are nervous and they're asking, 'If we make an order is it going to get filled? What's going to happen?' If somebody steps in and buys them that gives them the immediate comfort that 'Okay it is going to be there to back-order, and XYZ that bought it is a good company and they're going to be around so therefore my orders will get filled - and so therefore I won't go down the street to so and so and start buying from them. That's the thought."

And, as Collins reminds us, at this point in the proceedings, every action taken should be in the best interest of the creditors, not the management team.

"If you look at an ongoing business that's owned by Joe Entrepreneur, and he's going to sell his business, a lot of times they're more comfortable selling to a private equity fund because they believe that the private equity fund will keep all the employees and the key management people in place. Because they don't want to go run that company, they want to go on and buy the next company so they want to leave the management team in place.

"There's what we call a 'strategic' - meaning somebody that's already in the business - versus a 'financial' buyer or private equity fund. If you said to me, 'tell me which one of these two was more likely to replace the management,' the strategic is much more likely to replace the management team."

However, Collins points out, "Theoretically, the creditors shouldn't be taking that into account. That's the kind of difference that really gets taken into account by an entrepreneur who cares about his management team. The creditors' primary concern is getting the maximum proceeds from their debt."

Again, although unconnected with the current case, Collins offers another consideration that some companies might take into account in excluding one bidder over another.

"The only other reason I can think of to prefer a private equity fund over other bidders is that they may believe, or have been told, the private equity could do an all-cash offer and act quickly because there weren't financing contingencies. … It's almost like buying a car; you don't ever go buy a car and then go try to get somebody to finance it for you, you do it all at once. The strategic buyer typically needs to do it all at once, he needs to have a bank come in and give him money to loan, but an equity buyer can just cut a check for a company even that large size, and go back and get borrowing on it later. And it might be better for him to do that, because later down the road the company might be healthier and it might be easier for him to get financing."

Oldcastle Glass also stated in the emergency motion an objection to Piper Jaffray's advisement that Oldcastle Glass' access to the "electronic data room" be restricted.

According to Collins, in similar such cases, restricting sensitive buyers' access to proprietary information is a reasonable protection to take on behalf of an eventual buyer.

"If there's sensitive information, such as pricing and margin information, it would be very critical if I let you look at the company but you don't end up buying it-but you know my margins and you know my pricing. You're out there chugging along in the market and you can use that against me immediately, whereas I just bought the company and I need to get my feet underneath me … You'll be able to outbid me on jobs because you know what kind of margins I put into my bids.

"We refer to it as Level 1 and Level 2 information. Level 1 is what you give every Tom, Dick and Harry, and Level 2 is when you get down to a final couple of groups, or maybe even one group because they're going to be the final bidder. A perfect example is customer names. In our deals, only one buyer ever sees the customer names. Everybody else, when they get a sheet that describes customers they see customer A, B, C and D. So it is responsible for the investment bank to protect the [client]."

As Collins points out, what buyer would want a company that offers no proprietary information?

Collins adds, "It is legitimate to not give everyone the same information - except that it mitigates it a little bit when you're in a distressed situation like this. Creditors theoretically don't care about who gets what, they just want the maximum proceeds for their part of it. So it's a little bit different between an entrepreneur selling and a creditor committee selling, but it's still the same dynamics. You don't throw the doors wide open because that final buyer might say, 'well if you gave everybody that information I don't want to buy this thing, I'll just take my chances in the market competing against you.'"

Whatever the reason, Oldcastle Glass was not among the bidders in an auction scheduled for today of the assets of one of its largest competitor's.

Representatives of Piper Jaffrey had not offered a comment on this article as of press time.

Representatives of Oldcastle Glass have declined to comment.

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