In a matter of months, the big shots at HearUSA went from thinking of the many ways they were going to spend their millions to losing their jobs and getting pennies on the dollar for their shares. (An insider’s view of Spring 2011 at HearUSA)
I always thought this next-to-final chapter would be entitled “Clash of the Titans” with Oticon and Siemens duking it out over HearUSA. The facts, however, got in the way. Siemens and Oticon were just doing business–a really boring story. The juicy story, as always, remained HearUSA — the adolescent in permanent crisis who just would NOT take the cue to exit the stage. And so this post enters the final act of the melodrama{{1}}[[1]]This series ends next week, which is such a blessing.[[1]] with HearUSA chewing up the scenery and holding on to center stage for dear life … or in this case, death.
The Death Scene
The curtain rises on an old, faded HearUSA{{2}}[[2]]Think Gloria Swanson in Sunset Boulevard.[[2]] clinging improbably to the ingenue’s role, in total denial that it is way past its prime with nothing to offer. HearUSA is doing one of those ridiculously long, dramatic death scenes full of grandiosity and other delusional behaviors. This scene has been going on for 5 months, starting with Hear USA “reacting like a teenage girl throwing hissy fits”{{3}}[[3]]As readers may suspect, much of this was behind closed door rather than in print. Consequently, this post relies more heavily than other posts on remarkably colorful commentary provided by helpful but anonymous insiders. Those color comments are shown in italics.[[3]] when Siemens called in the loans. When hissy fits stopped working, HearUSA decided to run away from home (untangle the Siemens contract) but didn’t have enough money for a bus ticket. Out on the streets, HearUSA decided to “put lipstick on the pig” and sell itself, only to find — “much to its dismay” — that the market wasn’t interested. Siemens was its only suitor, but only if the going rate was at market value –about $20 on the street in this dramatized version of events. Desperate, HearUSA ran home, locked itself in the closet, cried piteously for help, and finally– FINALLY — plunged the knife in by filing 36 separate documents in bankruptcy court on May 16, 2011.
Enter the Stalking Horse
The Scream+ Knife strategy worked, so long as HearUSA didn’t mind dying on the auction block. William Demant Holdings A/S jumped on it, bidding $80 million and loaning HearUSA $10 million to maintain operations.
But if nobody wanted HearUSA before, why was Demant bidding all that money at the death bed? The answer lies in bankruptcy terminology and strategy. HearUSA persuaded Demant to take on the role of”stalking horse” bidder, meaning it tendered the “first, favorable bid solicited by the bankrupt company strategically to prevent low-ball offers.”{{4}}[[4]] https://en.wikipedia.org/wiki/Stalking_horse#In_bankruptcy [[4]] Stalking horse bidders are typically motivated financially to lead the bidding in a bankruptcy auction. Insiders speculate that there was about $10 million in break-up fees for Demant if they ended up not winning the auction, which probably covered the $259,000 HearUSA owed Demant for product.
Demant could very well have “scooped up” HearUSA for $90 million if there were no competitive bids. Other insiders have commented that paying $80 million for a company with $85 million in revenues is not a bad deal. Maybe so, but annual projections based on first quarter 2011 revenues ($14.8 million) suggest that HearUSA was only going to produce $61 million in revenues, so it is not clear that this was a scoop. All of which is just to say that Demant’s stalking horse bid didn’t really mean that Demant wanted or expected to get HearUSA. But there was little down-side for them: If they got it, Demant floated the idea that it would serve as a distribution channel for its Bernafon instruments. If they didn’t get it, they had succeeded in driving up the price for Siemens, which was a “worthy exercise for a competitor.”
Strategically, HearUSA knew all about stalking horses, having noted in its 2009 SEC Annual Report that
terms of our agreement with Siemens may discourage a third party from making a takeover offer which could be beneficial to HearUSA and its stockholders. {{5}}[[5]]The Stalking Horse Risk Factor as outlined in 2009 SEC Annual Report, p 14. [[5]]
HearUSA wanted someone to buy them for a LOT of money and that was not going to be Siemens bidding at market rate. What HearUSA needed was someone to come in with a high bid to prevent Siemens from getting the company for nothing (their view). Thus, getting Demant to act as the bankruptcy stalking horse provided the means of flushing Siemens out of the bushes.
Siemens’ reaction was not positive. For starters, the Demant bid specifically excluded the Siemens-HearUSA contract and didn’t cover the Siemens dispute over the sale of Canadian assets. In other words, if Siemens did not bid, it lost tons of hearing aid sales, lots of money in loans to HearUSA, and any money it hoped to recover from the Canadian asset sale. If it did bid, it had to bid higher than the stalking horse bid of $80 million. Bummer.
The Auction Cometh
Bankruptcy court set the auction timeline: procedures had to be approved June 6, the auction completed by July 18, and the sale approved by the next day. There were a number of unsecured creditors{{6}}[[6]]A docket filing listed the 20 top unsecured creditors.[[6]] who wanted to see the company auctioned for top dollar so they could get their money back. Their claims were acknowledged by the bankruptcy court, which appointed an Official Committee of Unsecured Creditors.
HearUSA’s Central Office still existed and was still doing somewhat fanciful PR. At the beginning of June, it sent out a letter and FAQ sheet to members of its network explaining the up-coming auction as a means of obtaining “highest and best offer” for assets. It assured offices and providers that it would be business as usual– an odd choice of phrases considering that the announcement cautioned providers to expect various court orders and assured them payment for claims filed “prior to filing date” while offering no such assurance as to payments for claims after the filing date.
Stay tuned for next week, when this series goes to auction and finishes unraveling the HearUSA story at last.
