The Chapter 11 Bankruptcy Code is a tremendous way to sell a company that otherwise would head to liquidation. The recent sale of Allied Healthcare Products is an example of utilizing the Section 363 sale process to efficiently maximize value for the estate. But for the intervention of highly skilled professionals, Allied would have ceased operations, and the company would have had to lay off all of its employees.
Allied Healthcare Products (“Allied”) is a leading manufacturer and provider of healthcare equipment centered on patient ventilation and gas delivery systems. Its products are sold under a variety of brand names.
In January 2023, Ravinia Capital received a call from SLR Business Credit asking if Ravinia would explore selling a division of Allied Healthcare Products. SLR was Allied's lender. Allied was preparing to shut down its main headquarters in St. Louis, MO. MorrisAnderson had been hired by Allied to help them assess the situation. They decided that the New York division, which was an old factory profitably churning out absorbent materials primarily used by anesthesiologists, should be sold.
Ravinia Capital and Tom Goldblatt went to visit the New York factory accompanied by a charismatic young rising star turnaround consultant, Akash Amin, of MorrisAnderson. Prior to the trip Ravinia signed an NDA and began to examine the situation. It was immediately apparent that Allied Healthcare Products had been a valuable leading company in several fields of medical products.
Allied Healthcare Products
Allied had been formed in the 1990’s by Harbor Capital Group as a successful roll up of several leading medical product labels. The company’s leading brand names still had placements in over half of the hospitals around the world. They had a successful IPO in the ‘90s, but the stock languished for decades. There was a moment near the beginning of the COVID-19 pandemic when the stock went up 2000%. That’s when it appeared that the company’s ventilators would be needed by millions of patients around the world. Orders came in for thousands of ventilators, and materials were ordered. Unfortunately, most of those ventilator orders were cancelled. Allied also owed more than $18 million in unfunded pension liability. Due to severe liquidity constraints, the Allied Board was left with few options and faced liquidation. The decision had been made by the Board of Directors to shut down the St. Louis facility. A WARN notice had been issued two months earlier, in November 2022.
On Closer Look...
Ravinia determined that Allied, with its well-recognized IP and leading placements in hospitals around the world, should have value to competitors.
It was apparent that the return from a sale to a competitor had the potential to easily produce several times more than the projected liquidation value of the company. Under FDA regulation medical products must be sold out of the location they are produced. Medical devices have almost no value in a liquidation.
Furthermore, Tom Goldblatt knew that a Section 363 sale process through the Federal Bankruptcy Court would free up a new owner to purchase the company as a going concern, and the responsibility for potential regulatory liabilities, environmental issues and the large unfunded pension balance problems could be addressed and solved.
It was clear that Allied needed a new direction.
Ravinia proposed that Allied reconsider the shutdown and let Ravinia sell the whole company. Akash Amin of MorrisAnderson was on board for a sale rather than a shutdown, as he had fielded calls from customers needing Allied’s products and unhappy to hear rumors of a shutdown.
Ravinia and Morris Anderson convinced Allied’s Board of Directors that given the amount owed to unsecured parties, including the pension plan, it made sense to cover their fiduciary duty to the stakeholders by running a sales process.
In that way it will be possible to testify in court that every effort was made to maximize the proceeds for each stakeholder.
In the end, the shutdown got reversed and up to 100 jobs were saved, as well as countless lives through the continued use of Allied Healthcare products. - St. Louis Post Dispatch article
Obstacles to a Successful Sale
The first order of business was to identify the major obstacles to achieving a successful sale:
The company was out of money and the existing lender did not want to advance any more proceeds on inventory that may be worthless in a shutdown. Thus, there seem to be no obvious source of funds to operate the company and pay for the bankruptcy process.
The Union was finding new jobs for its members and had negotiated severance for all its workers. Furthermore, they demanded that any company that buys the St. Louis factory accept their Union contract and fund the pension obligations.
Every product Allied Healthcare Products sold was regulated by the FDA and came with potential liability if not properly transferred.
The New York factory had a severe environmental liability issue from past seepage of waste into a nearby stream.
The Company had entered into a voluntary Brownfield Cleanup Agreement with the New York State Department of Environmental Conservation, which agreement is used to cap liability of the Company. From a marketing perspective, it would create a significant obstace to the sale process unless it was precisely documented and carefully explained. Further, Allied's environmental professionals needed to be prepared to explain and then defend objections or comments from bidders with respect to the limitation of liability.
The urgent nature of the issue made it necessary to firmly line up a stalking horse buyer within weeks so that each stakeholder; employees, vendors, customers, board members, lenders, would know the company has a future.
Solutions for a Successful Sale
Lack of Capital to Operate
Once it was clear that the existing lender was not willing to increase their funds, Ravinia tapped into its extensive network of lenders, searching out those who make the toughest loans. Luckily, due to past successes in similar tough distressed sales, Ravinia had credibility with Tom Siska and Gerry Paez of Sterling Commercial Credit. They believed in Ravinia’s ability to complete the sale, and therefore were confident to lend on the inventory and receivables. With the use of outstanding counsel at Blank Rome, and completed in a very short time, Sterling purchased the SLR note at par. Ravinia further, to provide funding to prevent the shutdown, secured a DIP loan from Sterling that funded operations and paid for all the professional fees involved in the bankruptcy.
Union Relations
MorrisAnderson and Ravinia were able to convince the Union that it was worth accommodating the need for flexible work rules, worth a delay to pay the severance package, and worth it for them to ensure a new buyer would not need to assume the Union contract. The Union became a good partner for keeping the St. Louis plant open and running.
Medical Regulatory Issues
To complete a rapid acquisition of Allied, potential buyers would need to quickly get comfortable with complex regulations for the thousands of items produced. The leading medical regulatory firm, Hogan Lovells, was engaged to produce a preemptive sell-side diligence report on Allied’s regulatory issues. Although they had conducted buy-side diligence hundreds of times, they had never been asked to produce a preemptive sell side document. This turned out to be a move of critical importance, as the Stalking Horse buyer engaged their own firm to conduct regulatory diligence. What would have easily delayed or killed the sale was averted as Hogan Lovells, because of their preemptive diligence investigation, defended the company on each regulatory issue. The Stalking Horse Agreement covered fees for the diligence reports, all of which diligence was shared with other potential buyers.
Environmental Issues
Environmental liability issues are some of the hardest to overcome in a bankruptcy sale, since Superfund environmental laws essentially take precedence over the bankruptcy laws. Ravinia populated a dataroom with an abundance of information to reduce concern about environmental liability.
Summary memos from an environmental consulting firm and an environmental law firm explaining the full history and present situation.
Memos explaining why a Brownfield Agreement with the state of New York should cap potential liability.
Immediately ordered environmental reports and therefore each Stalking Horse bidder had complete knowledge about all environmental issues relating to the property.
The Stalking Horse Buyer hired their own consultants, who came to different conclusions. The dilemma was resolved with a debate between the two consulting firms, which ended in a compromise solution that allowed the Stalking Horse to be comfortable executing an Asset Purchase Agreement.
Tight Timeline
Although it was clear that Allied was worth many times as a going concern, until there was proof that an outside company would be willing to buy it, the situation could unravel at any moment. Vendors were not willing to ship, employees were reluctant to stay, the company could not buy more product, the lender wanted to call in the loan, and everything hinged on proving that, despite Allied having lost millions of dollars for the last several years, someone would buy them.
To not waste a single precious day, Ravinia created a Confidential Information Memorandum (CIM) and a comprehensive data room prior to their engagement agreement even being executed. Since time was so short, a multi-step process was created that would require keeping to tight deadlines.
The first significant deadline was to pick a Stalking Horse Buyer using Indication of Interests (IOI). Eight four-hour visitation slots were created. The itinerary for each was the same: a tour of the St. Louis factory and a meal with management in the famous Hill restaurant neighborhood. Allied hosted seven visits in one week. Flexicare, a privately owned medical device company headquartered in the UK, emerged as the successful Stalking Horse bidder approved by the Court.
"Ravinia was a major catalyst for our success on the deal for two primary reasons. Firstly, they brokered the introduction to Sterling Commercial Credit, who provided our rescue capital and future DIP loan. Without those two key loans, plant operations would not have been able to restart. Secondly, Ravinia astutely identified the optimal stalking horse to maximize creditor return and value in the most timely manner." - Akash Amin, President and Chief Restructuring Officer at Allied
Fresh Approaches Were Created
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Tom Goldblatt demonstrates a clear understanding of the bankruptcy §363 sale process, acts as a seasoned maestro pulling coordinated resources together to achieve a desired result, keeps parties on schedule and accountable, and utilizes a robust marketing strategy to maximize exposure of assets to the market.
Tom has an appropriate bedside manner for his client(s) and the other professionals working the case, recognizes the work of others contributing to the process. - Kevin Hamerinik, FORVIS
Four Times Projected Liquidation Returns
Tom Goldblatt of Ravinia Capital, working with Akash Amen of MorrisAnderson, then launched a full-scale sales process, marketing Allied to more than one thousand private equity firms and strategic buyers.
More than 1,500 potential buyers were contacted.
The top 30 contenders were approached until they gave a clear answer. The result is that no stone was left unturned, as Goldblatt testified in court.
In the end, the shutdown got reversed and up to 100 jobs were saved, as well as countless lives through the continued use of Allied Healthcare products. Goldblatt was able to secure a Stalking Horse bid from Flexicare for a price amounting to more than four times projected liquidation returns.
Key Takeaways
The Allied sale could not have been done without the rules of the Section 363 sale which create a great framework to guarantee a fair and timely process, and give a company with outstanding liabilities a chance to continue.
Selling a company in a bankruptcy sale takes focus, determination, and a commitment to the mission of maximizing the return on the sale for all the stakeholders. A distressed sale comes with a lot of risk even for an experienced Investment Banker like Goldblatt. Even in the best situations some creditors or vendors may not get paid for their series, or equity may get wiped out. There will be disgruntled parties considering suing. Also, in a bankruptcy sale, everything is subject to intense scrutiny. There will be a court-appointed trustee making sure everything is fair, often there is a creditor committee formed with an eye to finding any faults with the sales process.
The only way to avoid these risks is to ensure that every single action is done with solid business judgment within the framework of being a mercenary for the stakeholders. It is critical to ensure that no action favors one party or the other, but that every action is taken with the best intention to increase the dollar amount brought in by the sale. Only then is it possible to confidently testify in court that every action was taken to run a process that reached every potential high bidder and maximized the proceeds within the time frame. This is as it should be since the rules of the Section 363 sale have the powerful right to eliminate liabilities owed and allow new buyers to operate the assets to allow the company to move forward as a going concern.
About Ravinia Capital
Ravinia Capital LLC is a middle market investment bank headquartered in Chicago, IL. The firm is a trusted advocate for companies who are looking for capital to invest for future growth, buy more time in tough situations, or facilitate succession, ownership transition or exit strategies. Ravinia specializes in merger and acquisition advisory services, capital raises (including debt refinancing), and helping clients develop and execute strategic alternatives. The firm has distinguished itself by building a track record of successful engagements that optimize outcomes by working with clients to uncover the range of options available to them.