💥A Wave of Cancelled Auctions💥
Updates: Lumio Holdings Inc., Buca Texas Restaurants LP, Conn's Inc., One Table Restaurant Brands LLC + New Coverage
Today we provide updates on a number of recent chapter 11 bankruptcy sale situations —most of which fizzled without even having a competitive auction. But first…
⏩One to Watch: Cerence Inc. ($CRNC)⏩
We love it when a company sprinkles in buzzwords to keep up with the latest fad. Enter “AI technology” company, Cerence Inc. ($CRNC).
Nuance Communications Inc. spun-off CRNC back in ‘19. The company builds AI powered virtual assistants for the mobility/transportation market and sells them as white label solutions to automobile OEMs. So while you’ve probably had the pleasure of talking to your car, you wouldn’t know it was powered by Cerence’s software suite since it would’ve been branded as if it’s your car manufacturer’s tech. For the uninitiated, it’s like Siri except it’s embedded into your car’s software.
An example would be Bayerische Motoren Werke AG’s ($BMW) virtual personal assistant, “Hey BMW.” You can use the Cerence powered BMW virtual assistant to … open the sunroof, set a destination, or change the radio station. We know, absolutely thrilling stuff.
Cerence tech can even warn you of nearby emergency vehicles, reminding you to make way. It detects these vehicles using the “unique sound structure inherent to emergency sirens”. Because you totally couldn’t hear the approaching sirens blaring with your own ears.
With all that being said, a virtual car assistant that works properly and responds to your voice can be cool. Cool in a K.I.T.T. from Knight Rider sort of way.
And so in the name of progress (and making a childhood dream of a real life K.I.T.T. reality), the market is steadily growing. According to a February ‘20 report from Voicebot.ai, 129.7mm drivers in the US have used a voice assistant in the car, up 13.7% from September ‘18. Total monthly and daily users also rose to 83.8mm and 29.7mm, respectively.
Cerence captures a good portion of these virtual personal assistants being deployed by the auto OEMs.
That’s 53% of 3Q’24 TTM worldwide auto production that has some sort of Cerence tech embedded in the onboard virtual assistant. Not bad.
At this point, you might be thinking, “wow AI tech company in a growing space, sign me up!”
Hold your horse(power) buckaroo.
Yes the company has the shine and luster of a fancy tech company but who are the customers? Auto OEMs. So what does that make the company? An auto supplier.
Which means it’s notably susceptible to a downturn in auto sales:
See FY’22 for the above two charts/tables and you’ll get an idea of how dependent on SAAR this company is.
And before you take a look at the capex numbers and think “wow this is such a low capex business,” it’s not. Spend happens at the operating expense level, specifically R&D. CRNC has spent over $100mm annually for the past three fiscal years despite its revenue declines.
Given the fast moving nature of AI, it’s a game of keeping up with the Joneses. Automobile OEMs are looking for more and more advanced generative AI and large language models.* You’d definitely need to have an appetite for burning cash to stay competitive.
And speaking of large coffers of cash to burn, CRNC’s competitors include the likes of Amazon.com Inc. ($AMZN), Alphabet Inc. ($GOOG) and Apple Inc. (AAPL). These are the actual tech giants with already developed virtual assistants and a treasure trove of resources to compete with. While they have the capabilities of infringing onto Cerence’s territory, there is no way Cerence can feasibly compete outside of automotives.
And as creatures of habit, wouldn’t we all prefer to use something familiar in the car? Whether that’s Siri, Google Assistant, or Alexa.
And this is not even accounting for other voice AI competitors like SoundHound AI Inc. ($SOUN) which, we’d be remiss not to mention, has its own detractors.
The stock has been on an absolute rollercoaster since the initial spin-off:
Again, refer to the financial summary table above, but it’s almost like the stock was buoyed by tech growth sentiments, only for investors to figure out this was, in fact, not a tech growth story.
And if we zoom in a little:
That massive drop in May is attributable to 2Q’24 results, when the company slashed FY’24 guidance due to an underperforming backlog.
Here’s former CEO, Stefan Ortmanns, on the earnings call:**
“After receiving Q1 royalty reports and noticing some downward trends, we commenced a deep account-by-account review of our backlog, which concluded in April. As a result of that review, we concluded that some customers’ production expectations are not materializing as expected or as reflected in our forecasts. Therefore, we are bringing down the full year revenue guidance by almost $40M at the midpoint, which represents an approximately 11% reduction in revenue.”
Management is now guiding towards midpoints of $47mm in revenues and negative $16mm in adjusted EBITDA for 4Q’24. On the bright side, there’s a cost savings plan (read: job cuts) that should be realized by FY’25 that will reduce annual operating expenses by $35mm-$40mm. Just enough to cover the guidance revision!
As of June 30, 2024, The company had $126.3mm in cash, cash equivalents, and marketable securities. That’s enough to cover the $87.5mm of unsecured convertible notes due June 1, 2025. Another $210mm chunk of convertible notes aren’t due until July 1, 2028.*** The company issued the ‘28 notes in June ‘23 along with a repurchase of the ‘25s.
According to FINRA, as of October 14, 2024, the ‘25s were last pricing in the 80s while the ‘28s were last pricing in the mid-50s.
Honestly, we’re rooting for this one, if only because we’re still hopeful a real life K.I.T.T. is still achievable.
*OEMs like Mercedes Benz Group AG ($MBG) are already testing ChatGPT integration.
**Mr. Ortmanns was replaced on October 7, 2024 by the former CEO of Intel, Brian Krzanich. Mr. Krzanich got fired from Intel back in ‘18 because of a relationship with an employee.
***Both convertible notes are out of the money. The ‘25s have a conversion price of $37.42/share and the the ‘28s have a conversion price of $40.72/share.
⚡Updates: Lumio Holdings Inc. + Buca Texas Restaurants LP⚡
October’s been a bummer for auction enthusiasts. Lumio Holdings Inc.* — another in the ever-lengthening list of failed solar/energy transition names — disappointed us on October 9, 2024, with this notice of cancellation. No one showed, so stalking horse White Oak Global Advisors LLC’s $100mm credit bid (plus liability assumption) was enough to win … well, what, exactly? A couple pickup loads of non-functioning solar panels?
We expected a vigorous auction for the assets of Buca Texas Restaurants LP** because, like, “generous portions and vibrant atmosphere,” who wouldn’t want that?! And a reliable supply of the Meatball Sandwich? Nope. The debtors dropped this notice of cancellation on October 4, which also designated pre-petition lender and stalking horse Main Street Capital Corp as successful bidder. All it took to bring that “unique dining experience” home forever was a $27mm credit bid, cure costs and assumed liabilities.
Why doesn’t anyone want to participate in these bankruptcy auctions, damn it? Not even just for the hell of it? C’mon now, distressed buyers, auctions are one of the most ancient forms of price discovery!
We’ve had a sweet spot for auctions since … well, that’s basically all we write about in bankruptcy these days … but also since reading how in 193 AD the Praetorian Guard, having assassinated the emperor, put the entire Roman Empire on the block. The competition was fierce:
Didius Julianus won it with a bid of 25k cesterces*** per Praetorian legionarii; the Guard was about 8k strong at the time, so this equates to 200m cesterces for the Roman Empire near the peak of its power. Didius Julianus debased the coinage as one of his first imperial acts; a few months later, the Praetorian Guard offed him. But hey, at least he showed up for the auction, without which he’d likely be forgotten.
*We previously covered this name here.
**And we’ve previously covered this name here.
***Estimates for the value of the cesterce range from fifty cents to $3.25, so $650mm.
⚡Update 3: Conn’s Inc.⚡
Speaking of auctions, well, we were psyched about the auction for Conn’s Inc., the Texas home goods retailer which filed … egads, that long ago? July? We wrote about the filing here ⬇️: a 130-year old company, a brutally competitive market, and a bad, bad bet on an in-house consumer credit program.
So why psyched? Because the bid deadline had been extended three times. And there were two “notices of revised bidding procedures timeline” on the docket. There was “significant interest” in the assets; potential buyers just needed some time to fine-tune the bid packages. We were hoping for something old fashioned, like insults and people thrown through saloon windows. It is Texas, after all. We covered all of the stalking horse drama here …
… and here:
But it wasn’t to be. On October 10, 2024, the debtor filed a notice canceling the auction and designating stalking horse Jefferson Capital Systems LLC (“Jefferson”) as the successful bidder. The purchase price, according to the APA, is $360mm minus costs and fees related to the closing of several receivables facilities. Well, the debtors are off the hook for that $10.8mm breakup fee.
And who is Jefferson Capital Systems LLC? Well, let’s just say you don’t want them to call or drop by for a visit. “We offer traditional collections servicing but do so a little bit differently. Or better.” Gulp. Conn’s is no more, but debts are eternal, especially if you’re one of those low-score borrowers. And Jefferson Capital is coming to collect.
A sale hearing is scheduled for October 24, 2024 at 1:00 pm ET in Houston.
⚡️Update: One Table Restaurant Brands LLC⚡️
One Table Restaurant Brands LLC, you may recall, was the hasty, perhaps panicked, July ‘21 combination of two fast-casual California restaurant chains, Tender Greens (“chef-driven comfort food”) and Tocaya (“embodies all that is California”). This was right after the pandemic lockdowns. The industry was reeling, particularly chains dependent on the office lunchtime crowd. There were the usual happy noises at the merger announcement: Tender Greens has the strong back office, Tocaya has the “design muscle.”
Well, it was a disaster, as we detailed here:
So they filed in July, with a $3mm new-money DIP from the prepetition lender and plans to market/sale. An affiliate of Breakwater Management LLP, the debtors’ pre- and post-petition lender, serving as stalking horse. And it’s now October.
So, look, we know it’s a tough market for the dining industry, but does it really take this long to get it done? Yes, yes, when all out war breaks out, it does.
Objections flew like fur in a cat-fight not all that long after the debtors’ July filing. The official committee for unsecured creditors (“UCC”), represented by Lowenstein Sandler LLP (David M. Posner, Gianfranco Finizio, Chelsea Frankel) threw the first punch on August 9, 2024 with a reservation of rights to the debtors’ second-day motions, including the all-important DIP financing (with the, lol, 4:1 rollup). “Many serious concerns,” they said, which included the “excessive” roll-up, the broad collateral package, the sufficiency of the budget, and “an atypical provision regarding section 363(k) which may be read to prevent the Committee from seeking to limit or object, for cause shown, the credit bid rights of the DIP Lender and/or Prepetition Lenders.” Many indeed.*
The beef with the UCC was significant because the debtors were looking to make quick work of these cases with a sale via auction. The court approved the bid procedures on August 22. The stalking horse notice and proposed APA with OTRB was served the next day. It stated that OTRB was not an “insider,” despite parent Breakwater’s status as prepetition lender, and that it contemplated a “credit bid of the full amount of the obligations owed by the Debtors under the Prepetition Loans and DIP Credit Facility.” The stalking horse agreement provided the following protections: a breakup fee of 3% of its actual bid, reimbursement of all costs and expenses not to exceed 1% of the bid, and finally, a minimum initial overbid of $100,000 “plus the maximum amount of any Break-up Fee.” An amendment followed on September 5, granting the stalking horse bidder an expense reimbursement of $500k, paid by the debtors.
This caught the attention of the U.S. Trustee (“UST”). Here’s your soapbox, UST, so wag your finger: “Breakwater, if outbid at auction, is not entitled to a $500,000 expense reimbursement.” Well then! Consider us schooled (the $500k assumes a credit bid of $40mm). “Breakwater should be required to provide support for claimed expenses to the Debtors, the Committee, and the U.S. Trustee.” Man, the post-Perdue era has the UST fired up!
The objections were resolved, or at least enough of them for Judge Owens to approve the settlement at a hearing in Delaware on October 7, 2024, thus clearing the way for the sale. Under its terms, Lowenstein agreed to “support and not object or otherwise challenge” the sale. The parties agreed to a revision of the stalking horse agreement. That $500k that so triggered the UST will be deposited into a “segregated bank account.“ It will be used to pay the fees and costs of “the bankruptcy professionals retained by the Committee.” Lowenstein anoints that half-million, plus the $200k already allotted the UCC, with the grand title of “Committee Funds.” (GUCs are apparently in line for whatever is left after the UCC pays Lowenstein; can’t imagine it’ll be much.) Other revisions included the inclusion of avoidance claims as purchased assets, and a covenant not to pursue avoidance actions against trade creditors or service providers. Can’t have committee members get their claims clawed back, can you?
The resolution also required the debtors to keep the estates administratively solvent through plan confirmation or dismissal. This includes paying that stub rent due the landlords, “fees” to the UST, and allowed Section 503(b)(9) claims. There are two paragraphs of releases, with sentences as long as anything in Faulkner and as fun to read as Finnegans Wake.
The sale order was entered on October 9. There’s still some billable hours available, though: the October 3 omnibus notes that various landlords filed objections in early October to the adequate assurance of future performance provided by OTRB. Some of those issues remain unresolved, Max Casal of debtors’ counsel Shulmann Bastian Friedman & Bui LLP said at the October 7 hearing, but negotiations continue; an additional hearing, if needed, is set for October 22 at 10 am ET.
Oh, but one more thing. Remember that “excessive” 4:1 rollup? Well, you’ll be happy to know it’s been preserved. The DIP authorized the debtors to borrow $3.5mm, with a “total collective rollup” of $14mm of the $28mm prepetition facility. From the final DIP order:
It just feels like there’s an unspoken industry-wide competition to see who can slide through the most egregious rollup ratio. 🤔
*A bunch of landlords joined the objection party early on too but we won’t bore you with details about requests for stub rent, and the like.
🍾Congratulations to…🍾
…The American College of Bankruptcy’s 36th Class of inductees.
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