SeraCare equity holders object to break-up fee for plan financing request, propose rights offering

By Caroline Salls

Pittsburgh, Aug. 25 - SeraCare Life Sciences, Inc.'s ad hoc committee of equity security holders objected to the break-up fee for a proposed up to $25 million in secured financing from a group of investors that would form the basis of a plan of reorganization, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of California.

According to the objection, the company is asking the court to authorize a $1.25 million break-up fee plus unlimited amounts for other termination fees and expense reimbursements "in connection with a non-binding letter of intent for an ill-advised financing that is, in effect, an impermissible sub rosa plan of reorganization."

The committee said better alternatives are available to the company.

The committee said the non-binding letter of intent calls for the investor group to provide $15 million in secured financing, and the financing could be increased to as much as $25 million.

According to the objection, SeraCare does not believe the secured loan will ever exceed $15 million.

The objection said the investor group will receive tranche A senior secured notes in exchange for the loan that may, at the election of the investor group, be exchanged at plan confirmation for tranche B senior secured convertible notes.

The tranche B notes would be convertible any time before 60 months from the closing of the tranche A notes at an initial conversion price of $5.50 per share.

The tranche B notes would be non-callable for the first three years after issuance and thereafter are callable, provided that a to-be-agreed-upon "make-whole premium" is paid to the investor group.

Rights offering proposal

After learning that there is broad interest among shareholders in SeraCare's stock, the committee said it told the company that it should alter its financing approach to adopt a rights offering under which each current shareholder would be given an equal right, as part of a plan of reorganization, to invest additional funds into the company.

To ensure the success of the proposed rights offering, members of the ad hoc committee have offered to backstop the offering by agreeing to purchase any offered shares in the rights offering that other existing shareholders do not purchase.

Under this scenario, the committee said it would ensure the success of the rights offering and provide SeraCare with financing, "without imposing a debt liability (likely accruing at 15%) on the balance sheet, without giving away 23% of the company to the investor group and without imposing on the estate an outrageous break-up fee and other liabilities that the investor group's proposal would entail."

Even if the court does not approve a rights offering, the committee said the break-up fee request should still be denied since the members of the committee are prepared to commit immediately to a proposal identical to that of the investor group, except that the committee members would not require the break-up fee.

In addition, the committee said it has performed a preliminary analysis of the value of comparable companies in SeraCare's industry, and applied the analysis to the investor group's proposal.

Using the low end of comparable valuations, the committee said the proposed investor group financing would likely result in a substantial windfall to the outside investors.

By contrast, if the rights offering is pursued, all current shareholders would have an equal opportunity to participate in the rights offering and retain their respective equity value.

A hearing on the investor group break-up fee is scheduled for Aug. 31.

SeraCare, an Oceanside, Calif., manufacturer and provider of biological products and services to diagnostic, therapeutic, drug discovery and research organizations, filed for bankruptcy on March 22. Its Chapter 11 case number is 06-00510.

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