Bankrupt and Distressed (BAD) Research and Due Diligence

[Madclown]

MBRKQ: On Wednesday, Judge Walrath signed an order approving the sale to Victory Pharma so it would seem that the term sheet offered up by EGI at the sale hearing did not curry enough favor with the Debtors or with the court to prevent the sale. I can only guess that the Debtors went with the bird in the hand theory since there was apparently some uncertainty surrounding EGI's standalone plan of reorg that was submitted at literally the last minute. Here are my thoughts on two of the remaining options even though the 363 sale appears to be final:

This is a little easier to value within the context of a Chapter 7 liquidation because we are dealing with a clearly defined pool of assets and a reasonably estimable pool of liabilities. Under the EGI term sheet, they don't clearly define what portion of the pool of assets would be distributable. $2 million of the $22 million is a DIP loan so it looks like the purchase price would be $20 million. Given that they don't define how much they are contemplating distributing I can't get totally comfortable with a value for the stock under the standalone plan contemplated by EGI other than to say that the recovery would be considerably more than the current price. Even though the 363 sale went through, the Judge's order is appealable so perhaps EGI will cure whatever defects their plan term sheet contained and then represent their offer. That option is likely a longshot because of the real threat of Victory walking away if their offer is spurned or challenged.

Right now I am looking at 2 pieces of information to try and value this stock. In docket #226 filed on July 23, 2010 by the equity committee, they stated that they believed the distribution to equity would be in excess of $10 million. That would equate to a per share value of about $0.116 but I am not certain if their distribution value is net of the effects of the payouts due under the Management Incentive Plan. I am assuming that statement by the EC was based on the distributable value under the Victory Asset Purchase agreement. The second piece of information I am looking at comes from the plan term sheet by EGI on Wednesday. In that document they state that the Debtors own assessment of EGI's offer would yield a recovery to equity that is 50% greated than the Victory offer. Based on that statement coupled with the EC's aforementioned statement, I will assume that the distributable value to equity under the EGI plan would be in the $15 million range which would be about $0.17 on a per share basis.