Court weighs Lenox's cash bid from KPS versus term-loan lenders' plan

By Rebecca Melvin

New York, Feb. 23 - Lenox Group Inc. and its term-loan lenders locked horns Monday at a bankruptcy court hearing on the company's decision to sell substantially all of its assets to an all-cash bidder that seemed to come out of nowhere.

That bid, from KPS Capital Partners LP, aced the term-loan lenders' stalking horse bid, becoming the only qualifying bid at auction Feb. 11, and thereby causing the auction not to be held.

The term-loan lenders have asked judge Allan Gropper of the U.S. Bankruptcy Court for the Southern District of New York to reopen the bidding.

"Nobody expected a cash bid to come forward. [Lenox] couldn't find one a year ago, as I understand," Gropper said at the end of proceedings Monday.

"Now there's cash on the barrel head. And we'll have to see whether it's better to have a bird in the hand or bird in the bush."

The hearing is set to continue Tuesday.

Gropper told the parties to come back with a form of asset-purchase agreement for closing by the second week of March, as per the request of debtor-in-possession agent UBS. He also asked the potential buyers to discuss their business plans with the creditors' committee "so there's a better understanding to what the clients are committed to."

Sign of the times

It's a situation that seems to be a sign of the times. The term-loan lenders agreed with Lenox prior to the company's bankruptcy protection petition in November to exchange a portion of their claim for the company's assets.

But additional financing was needed to execute the plan, and the lenders' prospective third-party lenders pulled out Feb. 6.

Lenox is a maker of tableware, collectibles and giftware.

With a cash bid on the table, Lenox began raising questions regarding the "conditionality" of the term-loan lenders' equity commitment, and they asked for the equity commitment to be de-linked from the debt commitment, the term-loan lenders alleged in a court document.

They also said that their bid is at least $15 million higher than the KPS deal.

Lenox, creditors see greater security in KPS

Lenox and its creditors committee told the court they believed KPS will provide more security for the company going forward as a going concern.

Lenox counsel Alfredo Perez of Weil Gotshal & Manges said that while the company had subsequently worked through several issues with the term-loan lenders to make an acceptable bid, there was still the issue of whether the term-loan lenders could guide the company forward and prevent it from falling into bankruptcy again.

"Liquidity is thin and it's a concern, but if they had brought this at the time of the auction, we would have qualified them as a bidder," Perez said.

"We ran a process and we are reporting where we think we are right now with KPS. And we are prepared to go forward with that, subject to the court's decisions," he said.

Lenders see 'windfall'

But the lenders claim KPS' bid is too low for considering the value of the company's assets.

Lenox "handed their assets to [KPS] on a proverbial 'china' platter at a price that, when analyzed as of the expected closing date and after all costs and adjustments are factored in, merely approximates that which would be realized in a liquidation sale, according to the lenders' filing.

"This not only results in a windfall to [KPS], but destroys the value of the term loan lenders' collateral, leaving them with the potential to receive virtually no recovery on their $100 million claim against the liquidation value of the debtors' assets, after payment of costs of liquidation."

Neither bid leaves anything on the table for distributions other than for professionals, term lenders, DIP lenders, and cure payments, Adam Harris of Schulte Roth & Zabel, counsel for the term loan agent, The Bank of New York Mellon, told the court.

Lenox term-loan lenders claim that as secured creditors their consent should have been sought or obtained prior to the acceptance of the KPS bid because they are seeking to sell their assets free and clear of the term loan agents' liens.

Jeffrey Cohen of Cooley Godward Kronish on behalf of the official creditors committee said: "At the close of auction 12 days ago, strategically as a committee we would have liked to have kept the auction open a few hours longer to see if the lenders could come up with qualified bid."

But even now the lenders have not come up with something that is acceptable to the debtors, Cohen added.

Counsel for UBS, agent for DIP lenders, said: "With respect to reopening of the bid, there have been modifications to the term lenders proposals that had they been evident on Feb.11, then they would have been deemed as a qualified bidder at that time."

If bidding is reopened, UBS counsel asked that the closing be set by the second week of March, that there would be no question by bidders on conditions of allocations received, and that there would be no request as the term-loan lenders have made for putting funds in escrow.

Cash offer could walk

KPS counsel said KPS has received $8 million from its limited partners for a deposit, and will have $67 million by Friday, for a total of $75 million. In addition, KPS has advised capital investors that it might need an additional $10 million to $20 million that could possibly be needed.

"This is an offer that has no debt, and the equity component has no upward cap on it," KPS counsel said.

He added that the term-loan lenders still have linkage of the equity commitment to the debt commitment, something that Lenox wanted taken out of the deal

"It's thin, and if it's that close, down to $3 million to $5 million in liquidity for the company in the month of May. If ever there was a case for not exercising discretion and preserving predictable rules in trying to get more money for the estate, this would be it," KPS counsel said, adding that if litigation gets too lengthy or cumbersome, his clients will walk away from the deal.

The term-loan lenders contend that by Lenox's own analysis, the revised term loan lenders' bid was valued at over $100 million and was the highest bid received for the assets.

According to Lenox chief executive officer Marc Pfefferle, the value of the assets (and, therefore, the value of the liens against such assets) being sold is between $70 and $80 million.

The term-loan lenders pointed out that another affiliate of KPS has entered into a letter of intent in connection with a proposed acquisition of the assets of Waterford Wedgwood. "So KPS is already committed to the debtors' industry and obviously believes there will be synergies and economies of scale to be created by combining the Waterford Wedgwood assets with the Lenox assets," a lenders' filing stated.

Eden Prairie, Minn.-based Lenox filed for bankruptcy on Nov. 23. Its Chapter 11 case number is 08-14679.

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