Merit Group committee disputes bid protections, Stonehenge credit bid

By Caroline Salls

Pittsburgh, June 23 - Merit Group, Inc.'s official committee of unsecured creditors objected to the bidding procedures for the proposed sale of substantially all of the company's assets, calling the bid protections "exorbitant' and arguing that insider second-lien creditor Stonehenge should not be allowed to credit bid, according to a Thursday filing with the U.S. Bankruptcy Court for the District of South Carolina.

As previously reported, the company would pay any potential stalking horse bidder a $1 million break-up fee if it was not the high bidder at auction and reimburse up to $1 million of its sale-related expenses.

"Even if a stalking horse agreement were fully negotiated with otherwise facially acceptable terms, the break-up fee and expense reimbursement are collectively exorbitant and will likely chill competitive bidding," the committee said in the objection.

In addition, the creditor group said the bid procedures would require any other potential purchaser to outbid the stalking horse bid by at least $2.5 million before it could participate in the auction.

"Such an overbid requirement may be too steep for competitive bidders and could lead to closing the doors on an auction before they even opened," the committee said in the objection.

As a result, the committee asked the court to deny payment of a break-up fee and allow the $1 million expense reimbursement, "subject to a review of expenses for reasonableness."

The committee said the court should also reduce the initial topping bid to $250,000 from $500,000. This way, the committee said competing bids would only need to exceed the stalking horse bid by $1.25 million instead of $2.5 million.

According to the objection, the committee also believes the structure of Stonehenge's loan documents would constitute grounds to recharacterize the lender's claims as equity instead of debt under the sale transaction.

"A blanket preservation of rights provision in the bidding procedures order will not solve the potentially chaotic and inequitable results that could stem from Stonehenge being permitted to credit bid at the auction," the committee said in the objection.

"A subsequent closing on a deal involving a credit bid of Stonehenge's note would mean that the cash portion of the purchase price would never come into the estate, and thus could not be escrowed.

"If Stonehenge's alleged note is ultimately recharacterized, subordinated or disallowed, the estate (and in particular, the unsecured creditors) would be in a position of having to chase down the buyer to recover the credit bid portion of the purchase price that was never paid to the estate."

The bid procedures hearing is scheduled for Tuesday.

Merit, a Spartanburg, S.C., paint sundry distributor, filed for bankruptcy on May 17. The Chapter 11 case number is 11-03216.

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