Stalking Horse Bidders: Not Your Typical Knight In Shining Armour

Finlay recently announced that it has appointed Gordon Brothers Retail Partners LLC as its stalking horse bidder (i.e. the proverbial knight in shining armour).

Apparently, Gordon Brothers' minimum bid would be 64.75% of the aggregate cost value of the merchandise plus an amount that will cover all expenses, such as payroll and advertising costs for the sale events, according to court documents.

I'm here to say what a rip-off this is. From my point of view, this seems to be more a case of prince turned frog rather than knight in shining armour.

Finlay reported close to $443 million worth of inventory on its balance sheet recently. Most of this jewellery would have been manufactured in either 2007 or 2008, when precious metals prices were much lower. At today's precious metals prices, the value of this inventory should in actuality be considered much higher. And considering that there will probably be very little wholesale interest in the Finlay merchandise since US jewellery retailers are still holding onto quite a bit of inventory, I am sure Gordon Brother will be able to collect some decent merchandise at bargain prices.

Moreover, the Finlay auction is being held very close to the holiday season, which is when the typical jewellery retailer will ring in roughly half the year's sales. As bad as retail sales may be, consumer demand for jewellery will still be strong enough. By starting at such a low minimum bid, Finlay is simply unnecessarily undervaluing their merchandise.

There is no doubt in my mind that the actual liquidation of the merchandise at retail level will be at least marginally profitable to Finlay. Selling its assets to a liquidator like Gordon Brothers at below cost at this stage in the process is very bad news for all Finlay bondholders when there is an option for Finlay to directly liquidate its merchandise with its extensive retail distribution presence. This is very unfair to bondholders. The only winner would be the buyer.

There is no other company in a better position to manage the liquidation sales of Finlay merchandise other than Finlay. Why should a stalking horse bidder interfere when it could very well erode bondholder recovery value?

If Finlay wants to sell at cost, why not do it at retail level? Why do it at 64.75% of cost at wholesale level? Could Gordon Brothers just be acting as an agent for another party in this sale? Am I missing something critical?

Some more interesting info to consider: sale-backs in bankruptcies...

To other Finlay bondholders... remember it's possible to object to the stalking horse bidder by writing into the bankruptcy court, the indenture trustee, and committee of unsecured creditors.