Monitor Group wins OK for sale of assets to Deloitte; price falling

By Jim Witters

Wilmington, Del., Jan. 11 - Monitor Co. Group LP won approval for the sale of substantially all of its assets to stalking horse bidder Deloitte Consulting LLP, but testimony during a hearing in the U.S. Bankruptcy Court for the District of Delaware showed that the actual purchase price may drop as low as $59 million from the $116.2 million stalking horse bid.

In granting the sale motion, judge Christopher S. Sontchi overruled objections from the official committee of unsecured creditors, who said the packaging of estate avoidance actions with the assets violated the bankruptcy code.

Under the asset purchase agreement, Deloitte will receive the right to pursue avoidance actions against certain Monitor partners. But the agreement also requires that Deloitte grant releases to those partners when the asset sale closes.

Creditors committee attorneys argued that there was no proof that Monitor received any value for the avoidance action assets, thus stripping the estate of a potential recovery that could have gone to unsecured creditors.

Monitor attorney Ross Martin argued that the avoidance actions belong to the estate and are part of the assets being sold to Deloitte for the purchase price.

Executives from Monitor and Deloitte testified that the releases Deloitte plans to grant some of the partners were essential elements of the deal and helped ensure that key Monitor partners would make the transition to Deloitte when the sale closes.

The releases are being granted to partners who accept positions with Deloitte and to Monitor partners who were not offered positions with Deloitte. Monitor partners who rejected offers from Deloitte will not receive releases.

Falling sale price

The value of Monitor's assets has been in steady decline since early 2011, according to court testimony.

A business identified in court only as Company A offered $200 million cash for Monitor's assets in early 2012, along with $60 million to $80 million for retention of Monitor partners.

That offer fell away in late May, though, as Deloitte entered negotiations.

Deloitte's initial indication of interest included $140 million to $160 million cash for the business assets, according to testimony.

In addition, Deloitte was offering $2.5 million to pay contractually required signing and retention bonuses to partners, $2.5 million for salaries that had been deferred and $4 million in new retention bonuses to be paid on the three-year anniversary of the partners' joining Deloitte.

By July, Deloitte's offer was $142 million cash, $30 million in assumed liabilities and $22 million for bonuses.

In the first draft of the asset purchase agreement submitted in October, Deloitte's purchase price was down to $119 million.

Subsequently, Deloitte decided to buy about $1 million in junior subordinated notes issued by Monitor partners in 2009 to infuse cash into the business. At the same time, Deloitte's cash offer fell to $116.2 million.

Monitor's chief financial officer, Daniel Lasman, testified that the most recent company financial statements resulted in a $37 million downward adjustment in the purchase price.

Lasman said the company's accounts receivables have diminished and it is not meeting EBIDTA projections.

The $79 million cash price could be further reduced after the sale closes, if Deloitte successfully pursues two $10 million escrow accounts.

Jack Russi, Deloitte's national managing partner for U.S. corporate development, told the court the company does plan to go after the $20 million in escrow.

Only bidder

Despite interest from Teaneck, N.J.-base Cognizant, Deloitte emerged as the only bidder for Monitor's assets.

Cognizant stated it may have been willing to pay $116.2 million cash, plus $5 million in retention bonuses and Deloitte's $3.5 million breakup fee, according to testimony.

But no formal bid was submitted.

The Deloitte sale also remains contingent on 80% of Monitor's key partners and 80% of Monitor's other partners accepting positions with Deloitte.

Cash collateral

Bank of America NA had objected to Monitor's request for a $6.7 million post-sale wind-down budget to be funded with the bank's cash collateral.

However, the parties struck a deal in the hallway during the lengthy sale hearing.

Timothy Graulichm, representing Bank of America, said that, as sale proceeds declined, his client became concerned that its secured debt may not be fully covered by the sale proceeds.

But the bank agreed to a $2.3 million reserve for the payment of withholding tax liabilities should the Internal Revenue Service determine that individual partners executing the sale contract are subject to taxation on the proceeds.

The bank also agreed to a $4.75 million wind-down fund and a pre-sale carve out to pay professional fees.

Once the wind down is complete, Bank of America will receive any funds remaining in those accounts, Graulichm said.

The agreement on cash collateral had not been drafted before the conclusion of the Jan. 11 hearing.

Judge Sontchi set aside 1 p.m. ET on Jan. 14 for any further matters to be heard. But the attorneys said they believed they could agree on the form of order and planned to submit it to the judge under certification of counsel.

Monitor, a Cambridge, Mass.-based strategy consulting firm filed for bankruptcy on Nov. 7. Its Chapter 11 case number is 12-13042.

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