Valuation doesn’t pass smell test with the Bankruptcy Court

BVWireIssue #169-1
October 5, 2016

Shareholders in a bankrupt company rarely get to form an equity committee that represents their interests during the reorganization proceedings. But, in an extraordinary bankruptcy case, shareholders, crying foul over the valuations of the company, persuaded the court a committee was necessary.

‘Dramatic’ value adjustments: The subject was Horsehead, a leading producer of zinc and manufacturer of value-added zinc products. The company had two profitable subsidiaries but ran into trouble with its plan to build a state-of-the-art plant in North Carolina. Although the company experienced difficulties in 2015 and 2016 due to declining zinc prices, in December 2015, management, in numerous public statements, represented there was sufficient liquidity to continue operating and proceed with the building of the plant. A KPMG valuation report suggested the company was worth $1.1 billion.

However, two months later, the company filed for Chapter 11 bankruptcy. A valuation on behalf of the debtors lowered the value of the company to between $255 million and $305 million. The analysis essentially assigned zero value to the plant, in which the company had invested between $500 million and $550 million. Shareholders challenged the debtors’ post-petition valuation and asked for an equity committee. As they saw it, company management, confronted with problems, surrendered control to “a savvy hedge fund” that tried to exploit its knowledge of bankruptcy proceedings to quickly take over the company’s assets for less than adequate consideration.

Shareholders, including several well-spoken, knowledgeable investors, took particular issue with the zero valuation of the plant.

The court agreed that the company’s actions raised questions. “To put it bluntly, something doesn’t smell right to the Court,” the bankruptcy judge said. He referred to unexplained, “dramatic” adjustments in valuation in a short period. The court ordered the formation of an equity committee.

The case is In re Horsehead Holding Corp., 2016 Bankr. LEXIS 3187 (May 2, 2016). A case digest and the court’s opinion will be available at BVLaw.

Extra: The hearing features candid, and highly readable, testimony by personal investors who know their way around valuing a company. A transcript is available here, courtesy of BVLaw.

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