Law360, Wilmington (March 09, 2015, 9:20 PM ET) -- SITO Mobile Ltd. told a Delaware bankruptcy judge Monday that it will sue mobile ad company Hipcricket Inc. if it goes ahead with a reorganization offer from ESW Capital LLC, arguing the debtor would be breaching the stalking horse asset purchase agreement it came into Chapter 11 with.
During a marathon hearing in Wilmington, SITO contended that its side had the sale “process pulled out from under them” when Hipcricket decided to deem ESW's offer — which the debtor says represents a $2.7 million overbid of SITO's $4.5 million stalking horse offer — the winner of a Friday auction.
SITO argues that ESW, whose offer contemplates purchasing stock in a reorganized Hipcricket after a Chapter 11 plan is confirmed, never qualified as a bidder because its bid contemplates a totally different transaction from SITO's planned asset purchase and doesn't follow the auction procedures the court approved in January.
“What we have here is a massive failure to present a qualified bid other than my client's bid,” Joseph P. Davis III of Greenberg Traurig LLP said in court. “My client has the ability to close and will do so tomorrow.”
But Hipcricket pushed back, arguing that ESW's offer is indeed a superior one that would multiply the recovery for unsecured creditors to 10 times the SITO bid, debtor's attorney James O’Neill of Pachulski Stang Ziehl & Jones LLP said in court.
If Hipcricket had stuck with SITO's offer, unsecured creditors could only expect no more than a 2 percent recovery, but ESW's bid balloons that prospect to up to a possible 21 percent if certain other conditions are met, the debtor argued.
“There is no doubt that the ESW offer is by far the better bid,” O'Neill told U.S. Bankruptcy Judge Laurie Selber Silverstein.
The issue was sparked by Hipcricket's decision Friday to deem ESW's bid the winner of a bankruptcy auction where stalking horse SITO did not put in an overbid but only lodged an objection that the debtor was considering the rival suitor's bid, according to court records.
While both the offers start with a $4.5 million cash purchase price, ESW puts in a $2.7 million overbid that aims to take out nearly $4.3 million of Hipcricket's debtor-in-possession financing and land at a final cash purchase price of $3.5 million with about $2 million available to fund a recovery waterfall. SITO's offer only takes out $3.4 million in stopgap financing to arrive at a $1.4 million final cash purchase price, with $495,000 available for the waterfall, according to Hipcricket's comparison of the bids in the court record.
Another major difference between the two offers is that SITO's bid contemplates consummation of an agreement to buy up Hipcricket's assets in a deal to be closed this week, while ESW's transaction would be a purchase of equity in a reorganized company after a Chapter 11 plan is confirmed, possibly in June, according to court records.
When the clash made it to court Monday, it took the unusual turn of Davis telling Judge Silverstein that SITO was sweetening its offer with consideration that included $900,000 more in cash.
The issue then shifted into an evidentiary hearing, with SITO claiming it intends to assert claims including breach of contract, breach of the covenant of good faith and fair dealing if Hipcricket abandons a sale for a reorganization.
Judge Silverstein said she plans to render a ruling over the sale issue from the bench Tuesday afternoon.
Hipcricket filed for Chapter 11 protection in January, citing intense competition for revenue among more-established mobile marketers, and had a deal in hand for SITO to act as stalking horse with a $4.5 million bid.
The company, which provides so-called end-to-end data-driven mobile advertising and marketing through its proprietary Ad Life software platform and says it has been involved in more than 400,000 marketing campaigns, listed $12 million in liabilities, most of it trade and business debt, and its interim CEO said in a first-day declaration that the company has been incurring operating losses since at least 2012.
SITO Mobile Ltd. is represented by Dennis A. Meloro, Nancy A. Mitchell, Matthew L. Hinker and Joseph P. Davis III of Greenberg Traurig LLP.
Hipcricket is represented by Ira D. Kharasch, Linda F. Cantor and James O’Neill of Pachulski Stang Ziehl & Jones LLP.
They are resolving ch 11 case as quickly as possible.
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