Financial distress is leading to a deluge of restructuring activity and bankruptcy filings. Big pharmaceutical M&A is in vogue. Energy and technology M&A also put in extremely strong showings. The new regulatory environment is also unfolding through a combination of settlements and new rules from the SEC and FINRA. See our Related Resources for more on the restructuring events, M&A transactions, offerings, and regulations defining today’s business law environment.

Restructuring

General Motors (GM) and Delphi confirmed that they have entered into an agreement whereby GM will reacquire its former subsidiary’s steering operations. Delphi was spun off from GM in 1999 and has languished in bankruptcy since 2005. The auto parts supplier is one of GM’s primary vendors, but it also suppliers other auto manufactures. The deal’s terms are undisclosed, but GM has agreed to increase its credit commitments to Delphi to $450 million from $300 million. Delphi and the progression of its bankruptcy case could have extreme ramifications for GM, which, despite the spinoff, never fully cut the ties that bind the two and for the North American auto industry in general.

In related news, GM’s latest 10-K came with the caveat that its auditors issued a going concern warning. “Going concern” is an accounting term used to describe a business that can operate for the foreseeable future (until the next 10-K). Auditors are at risk of being sued by financial statement users if a company becomes bankrupt without the possibility having been flagged by a prior warning. And more importantly, from the companies’ perspective, a going concern warning can trigger technical default on loan covenants, push the stock price off the cliff, and practically assures that no lifesaving finance will be forthcoming without a bankruptcy filing.  The warning, while not unexpected, is yet another arrow in the Detroit powerhouse.

Ford Motor Company, the only member of the formerly Big Three to shun government funding, announced debt exchange, conversion, and cash tender offers intended to reduce outstanding indebtedness by $10.4 billion. The company has $25.8 billion in outstanding debt, of which $20.7 billion is eligible to be restructured. The offers structure and results will be closely watch because they are seen as an indicator of how similar, but government mandated, exchange offers at GM and Chrysler.

Harrah’s Entertainment, Inc. has announced another exchange and tender offer to further pare its debt burden. The offer envisions exchanging $2.8 billion in news notes and cash for an undisclosed amount of outstanding notes. The new notes will be senior to any old notes not exchanged.  The company’s last exchange offer is already the target of a lawsuit, which claims that Harrah’s “arbitrarily and unilaterally” refused to allow some note holders to participate in the offer. It remains unclear if the new offer is structured in a similar manner.

MGM Mirage, like the rest of the casino industry, is proving that the house doesn’t always win. The Vegas power recently postponed it 10-K filing to assess its financial position and liquidity needs. The company was also reported to be in pursuit of an eleventh hour debt restructuring with Deutsche Bank, but the negotiations have apparently broken off. MGM will have to roll the dice by March 17 on its 10-K. Its auditors will have determined by then if the company’s financial position warrants a “going concern” warning.

Bell Canada Enterprises (BCE) announced it plans to acquire The Source for an undisclosed sum. The Source’s 750 stores represent the Canadian operations of the recently liquidated Circuit City.  The acquisition will greatly enhance BCE’s retail presence and more than 70% of Canadians live within five of stores operated or licensed by the source.

Clarion Capital Partners, a private equity firm, purchased the assets of luxury dinnerware maker Lenox Group in a Section 363 bankruptcy sale.  KPS Capital, a distressed investment fund, had initially won the bankruptcy auction. However, there was an error in the auction and the sale procedures were reopened. The Clarion acquisition values Lenox’s assets at $100 million.

Masonite announced it has reached an agreement in principle with senior lenders to reduce its debt obligations. The Kravis, Kohlberg, and Roberts (KKR) backed Canadian door manufacture plans to reduce its total funded debt by nearly $2 billion, from $2.2 billion today to up to $300 million upon consummation of the plan. The restructuring will most likely be implemented through a prepackaged Chapter 11 filing in the U.S. and similar proceedings under the Companies’ Creditors Arrangement Act (CCAA) in Canada.

Changing World Technologies, represented by Klestadt & Winters, filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in the Southern District of New York. The petition lists assets totaling $30 million and liabilities totaling $8.18 million. The biofuels manufacturer had been slated to go public in an IPO last month. However, bankruptcy was the only option without a fresh infusion of capital because maturing debt and costs associated with patent commercialization. The company’s largest unsecured creditor is its former IPO adviser Weil, Gotshal & Manges, with an $800,000 claim.

Joe's Sports & Outdoor, under the names G.I. Joe’s Holding Corp. and G.I. Joe’s Inc., represented by Proskauer Rose and Potter Anderson & Corroon, and affiliates filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in the District of Delaware. The petition lists between $100 million and $500 million in both assets and liabilities. The private equity (PE) backed Northwestern-based sporting-goods retailer is another victim of the twin-pincers of reduced consumer spending and an overleveraged capital structure. The company’s largest unsecured creditors include Baja Inc. and Columbia Sportswear, with $1.2 million and $900,000 claims respectively. The debtor has secured a $50 million DIP financing commitment from Wells Fargo Retail Finance.

Magna Entertainment Corporation, represented by Weil, Gotshal & Manges and Richards Layton & Finger, filed for Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court in the District of Delaware. The company also plans seek recognition of the Chapter 11 proceedings from the Ontario Superior Court of Justice under Section 18.6 of the Companies' Creditors Arrangement Act (CCAA) in Canada. The petition lists assets totaling close to $1 billion and liabilities totaling $959 million. The manager of numerous racetracks and one-third of the Triple Crown needed to welsh on some of its debt. Magna had previously attempted an out-of-court workout but this proved to be a nonstarter. The company’s unsecured creditors include Bank of New York Mellon’s $203 million claim as indenture trustee and thoroughbred associations with much smaller claims. MI Developments, the debtor’s largest secured creditor and controlling shareholder, has committed to a $62.5 million debtor-in-possession (DIP) financing. MI Developments has also entered a “stalking-horse” bid of $195 million for certain Magna Assets.

Monaco Coach, represented by Pachulski Stang Ziehl & Jones, filed for Chapter 11 protection in the U.S. Bankruptcy Court in the District of Delaware. The petition lists assets totaling $442 million and liabilities totaling $209 million. The recreational vehicle manufacturer was put to the wall by the consecutive blows of formerly high gas prices and the current consumer slowdown. The company is attempting to secure DIP financing.

Redcorp Ventures, a Canadian mining company with properties throughout the world, filed for bankruptcy protection with the U.S. Bankruptcy Court in the Western District of Washington and under the Companies' Creditors Arrangement Act (CCAA) in Canada. The company estimated its assets at $100 million and liabilities totaling in the $100 to $500 million range. Redcorp cited lack of financing as the catalyst for the filing.

W. R. Grace & Co. disclosed that it is paring back its exit financing ambitions from $1.5 billion to $1 billion. The building materials manufacture has floated in the nether regions of corporate bankruptcy since its 2001 filing. The company attributed its reduced financing goals to the credit crisis and warned that the tumult in credit markets could delay its exit plans.

The Lloyds Banking Group, which was formed by the government-sponsored acquisition of Halifax Bank of Scotland (HBOS) by Lloyds TSB Group last year, has struck a deal with the U.K. government to insure billions of pounds in questionable assets. The deal will push Britain’s stake in the already partially nationalized bank above the current 43.5%. The deal was struck under the U.K.’s Asset Protection Scheme.

M&A

Dow Chemical has agreed to go through with its acquisition of Rohm & Haas. The two companies had been set to clash in Delaware court over Dow’s refusal to close the transaction. Dow balked claiming that the credit crisis represented a force majeure of sorts and that consummating the transaction would cause irreparable harm to the combined companies. Dow also lost a chunk of financing after a Kuwaiti company pulled out of a joint venture that was to partially finance the transaction. However, Rohm was unmoved by any of these arguments. The out-of-court compromise will enact the merger on the same terms – $78 per share plus a ticking fee that brings total consideration to just under $79 per share, but Dow did secure investment agreements from Rohm’s two largest shareholders to partially finance transaction. Paulson & Co. Inc. and The Haas Family Trusts agreed invest up to $3 billion in preferred and convertible equity securities.

Merck and Schering-Plough are planning a $41.1 billion cash and stock merger. The deal will be financed with a combination of $9.8 billion from Merck’s existing cash hoard and $8.5 billion from J.P. Morgan. The megabank (notably, a Troubled Asset Relief Program – TARP –participant) has committed to a $3 billion, 364-day bridge term loan and $5.5 billion in new and amended revolving credit facilities. See today’s issue of Legal Currents for more on the transaction.

The New York Times Company raised $225 million through a sale-leaseback transaction encompassing the 21 floors, or about 60%, of its corporate headquarters. The transaction is structured more like a back-loaded loan then a tradition sale-leaseback. The lease term is 15 years but has three renewal options that could extend the term for an additional 20 years.  The first year’s annual rental rate is approximately $24 million and will increase 1.5% per year for the first 10 years. The publisher has the option to repurchase the building after 10 years. If the option is not exercised, then the annual rent rate will increase 2.25% per year for the duration of the transaction. The company will use the funds to redeem $250 million in outstanding debt that matures next year. The other 40% of the building will continue to be owned by Forrest City Enterprises.

Roche revamped its hostile offer for the 44% of Genentech that it doesn’t already own. Only 500,000 were tendered under its $86.50 per share offer. The new offer values Genentech at $93 per share, or about $48 billion total. The new offer leaves all other deal terms unchanged. Reportedly the two companies are in negotiations that contemplate a friendly transaction at around $95 per share.

Scientific and technical instrument supplier Beckman Coulter agreed to purchase the diagnostic systems assets of Olympus Corp. The $800 million deal is conditioned upon the execution of a transitional services agreement.

Italian energy company Eni SpA sold two of its wholly owned units Italgas SpA and Stoccaggi Gas Italia SpA to Snam Rete Gas SpA for €3,070 million and €1,650 million, respectively. The purchases will be financed by Snam Rete Gas through a rights issue and new loans and are expected to close by July 2009.

First Solar, a maker of solar panels, had the bright idea to buy a power project development business development for $400 million from its credit market hobbled peer OptiSolar.

Talisman Energy Inc., a leading Canadian oil and gas company, entered into an asset purchase agreement with TriStar Oil & Gas Ltd. and Crescent Point Resources LP to sell its Non-Core Saskatchewan Assets for nearly $560 million.

Internet software company VeriSign, Inc. entered into an agreement to sell its Communications Services Group business division to TNS, Inc. for $230 million. The deal is conditioned upon obtaining financing, the execution of a noncompetition agreement and an employee non solicitation agreement.

Regulation

Whole Foods Market reached a settlement agreement resolving the Federal Trade Commission’s (FTC) antitrust challenge to the organic grocer’s 2007 acquisition of Wild Oats. Under the terms of the agreement, a third-party trustee has been appointed to divest from the combined entity:  leases and related assets for 19 non-operating former Wild Oats stores, and related fixed assets for 13 operational stores (12 from legacy Wild Oats and one from Whole Foods), and Wild Oats trademarks and other intellectual property.

The SEC settled charges with 14 specialist firms, including subsidiaries of several major brokerages and investment banks for making improper trades that benefited themselves before their customers (i.e., front-running). Under the settlement agreement, the specialist firms agreed to pay $70 million for unlawful proprietary trading.

In order to better protect investors, the SEC unveiled plans to overhaul its process so that it is better equipped to respond to whistleblower complaints and enforcement tips. Working with the MITRE Corporation, the SEC intends to conduct a complete review of its internal procedures used to assess tips, complaints, and referrals in hopes of establishing a more centralized process. Similar plans were also announced by FINRA who announced that it was creating a new “Office of the Whistle-blower” to handle tips and complaints.

The New York Stock Exchange (NYSE) filed a proposed rule change which would eliminate broker discretionary voting for the election of directors. In addition, the proposed rule change would also codify two interpretations that had been published earlier that prohibit broker discretionary votes for material amendments to investment advisory contracts.

A NYSE proposed rule change which would amend NYSE Rule 17 to address issues related to vendor liability and to make amendments to NYSE Rule 18 under Rule 19b-4 of the Securities Exchange Act of 1934 was given immediate effectiveness by the SEC.

The NASDAQ Stock Market proposed a rule to abolish the $3 underlying price requirement for continued listing and listing of additional series became effective under the Securities Exchange Act of 1934. 

Offerings

There were several large public debt offerings:

• BP Capital issued and sold $3.25 billion in guaranteed notes in three parts. Sullivan & Cromwell acted as counsel to the issuer and Cleary Gottlieb Steen & Hamilton represented the underwriters.
• Coca Cola issued and sold $2.25 billion of notes in two parts. Skadden, Arps, Slate, Meagher & Flom acted as counsel to the issuer and Alston & Bird represented the underwriters.
• Eli Lilly issued and sold $2.4 billion of notes in three parts. Sidley Austin acted as counsel to the issuer and Davis Polk & Wardwell represented the underwriters.

The FDIC’s Temporary Liquidity Guarantee Program (TLGP) continued to breathe life into the otherwise moribund financial services corporate debt markets:

• Bank of America issued and sold 8.5 billion of guaranteed notes.
• Keycorp issued and sold $437.5 million of guaranteed notes.
• State Street Corp. issued and sold $1.5 billion of guaranteed notes.

Several banks announced participation in the Treasury’s original bank bailout, the Capital Purchase Program (CPP):

• Citizens Bancshares Corp.
• Community First Inc.
• First Federal Bancshares of Arkansas Inc.
• First M&F Corp.
• Lakeland Financial Corp.
• Medallion Financial Corp.
• Southern First Bancshares Inc.