Entertainment Publications bidder concerns to be heard at sale hearing

By Jim Witters

Wilmington, Del., April 18 - Entertainment Publications, LLC may proceed with its scheduled April 19 auction under the bidding procedures approved in March, and the concerns about fairness and collusion raised by one bidder can be heard and decided at the sale hearing, a judge said on April 18 during a telephonic status conference in the U.S. Bankruptcy Court for the District of Delaware.

Judge Brendan L. Shannon, sitting in for case judge Christopher S. Sontchi, said the duty and discretion lies with Chapter 7 trustee Charles M. Forman to work with bidders before and during the auction to "allow all parties to meaningfully participate."

The status conference was convened at the request of EQI Acquisition, LLC, an entity organized by three members of the Stanton family. The Stantons operate SaveAround, Inc., Entertainment Publications' largest competitor.

EQI submitted a $10 million cash bid for substantially all of Entertainment Publications' assets, said EQI attorney Harvey D. Mervis.

That bid is in competition with a stalking horse bid from HSP-EPI Acquisition, LLC that includes $6.33 million in cash and a $5.5 million note held by secured lender Fontella, LLC. Under the HSP-EPI asset purchase agreement, Fontella also would receive warrants to buy 10% of the capital stock of the purchaser upon a liquidation event.

Mervis said there also are indications that Fontella could receive a second tranche of warrants.

Mervis said the Fontella note and the warrants included in the stalking horse bid make the bid extremely difficult to value and place his client in the position of bidding cash against debt.

"We could be the prevailing bidder at the auction and find ourselves objecting to the sale because the structure of the procedures and the stalking horse bid forced us to bid more," Mervis told the court.

Courtroom debate

To "level the playing field," EQI had sought disclosure of the Fontella note and the stalking-horse warrants to potential bidders; provisions for other bidders to give a note to Fontella to ensure "that bidding is on a level playing field"; and a determination of "whether there is potential collusion between Fontella and the stalking-horse bidder."

EQI has been in negotiations with Fontella to obtain access to a note similar to the agreement between Fontella and HSP-EPI. But no deal has been struck.

The Fontella attorney said that his client has fully disclosed the terms of the HSP-EPI note and warrants to EQI, but cannot provide documents because no documents have been produced.

And Fontella informed EQI of the value Fontella attaches to the HSP-EPI bid, he said.

Fontella has engaged in no collusion with the stalking horse bidder, the company's attorney said.

If any party's motivation should be questioned, it is the motivation of EQI, which stands to benefit from the collapse of the sale process, he said. If the debtors fold, SaveAround is left as the largest discount coupon fundraising book producer in the nation.

"We want to see a cash bidder emerge. And we want to see a run-up at the auction," the Fontella attorney said.

Kim R. Lynch, representing the Chapter 7 trustee, said the Fontella note carries 8% interest and the terms of the warrants is spelled out in the asset purchase agreement, so full disclosure has been made.

She also said the stalking horse raised its bid.

Timothy Hoffman, attorney for HSP-EPI, said under his client's revised bid, the money flowing to the trustee rises to $1.2 million from about $800,000.

EQI's $10 million cash bid brings no value to the estate and no recovery to unsecured creditors, Hoffman said.

The HSP-EPI bid pays in full all creditors, other than Fontella, which has agreed to accept the $5.5 million note in lieu of payment in full at closing, he said.

Shannon's comments

Judge Shannon said he could "offer little comfort" to EQI.

The theme of the March 25 rulings by judge Sontchi was that the trustee is authorized to run and capable of running the sale process and auction, he said

The court cannot require Fontella to offer EQI or any other potential bidder a note or other arrangement, Shannon said.

Judge Sontchi will determine at the sale hearing whether the bidding and auction were conducted in a fair way and in accord with the procedures approved on March 25.

"I am not sure we are at the apples-to-apples comparison yet (concerning the two bids), but I hope the blanks can be filled in before the auction," Shannon said.

The auction is scheduled for April 19.

The sale hearing is scheduled for noon ET on April 22.

Entertainment Publications, a Troy, Mich.-based coupon book publisher, filed for bankruptcy on March 12. Its Chapter 7 case number is 13-10496.

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