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NYC:245106.7
INTRODUCTION
1.
In the Bidding Procedures Motion, the Debtors seek approval of the terms thatwill govern the timing and substance of an expedited sale of what is referred to in the saledocuments as “all or substantially all” of the Debtors’ assets to Clearlake Capital Group, L.P.(“Clearlake”).
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If a sale or liquidation of the Debtors’ assets is the best means by which tomaximize and realize value for the Debtors’ unsecured creditors, so be it. Nonetheless, thebidding procedures must be fair and reasonable and provide for a bona fide and robust biddingprocess.2.
Approval of the bidding procedures (the “Bidding Procedures”) proposed by the Debtors and Clearlake would have the opposite effect. The Bidding Procedures appear to have been designed specifically to thwart any potential bidders from stepping forward to compete withClearlake’s bid. The Bidding Procedures contain numerous provisions that would limit bidding,including, among other things, (i) an unjustifiably accelerated sale timeline that will prevent prospective bidders from having an opportunity to “diligence” the Debtors’ assets prior to submitting a bid, (ii) a requirement that prospective purchasers bid on the Debtors “as a whole”rather than on a “piecemeal” or “title-by-title” basis, (iii) various provisions that would allow the Debtors to unreasonably reject bids and/or bidders regardless of the impact to the Debtors’unsecured creditors, and (iv) provisions that grant Clearlake unreasonable amounts of control over the bidding process. Rather than being designed to maximize the value of the Debtors’estates, the Bidding Procedures, by design or otherwise, render the “auction process”meaningless and virtually guarantee that Clearlake will be the ultimate buyer, thereby ensuring
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In fact, Clearlake can “pick and choose” the assets and contracts it wants to acquire.
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NYC:245106.7
that the Debtors’ management retain their positions within, and operating control over, theDebtors’ organization.3.
Because the Bidding Procedures are neither fair and reasonable nor designed tomaximize the value of the Debtors’ estates, they should not be approved.
BACKGROUNDI. C
OMPANY
O
VERVIEW
4.
The Debtors develop and publish “video games” for various game consoles,personal computers, wireless devices and the internet. The Debtors’ game portfolio includesaction, adventure, fighting, role-playing, simulation, sports and strategy games. The Debtorsmarket and distribute these games to mass merchandisers, consumer stores, discount warehousesand other national retail stores, as well as through the internet, throughout the United States andinternationally.5.
Although these cases were just commenced and no discovery has taken place, itappears that the Debtors’ most valuable asset is its intellectual property and the goodwill relatedthereto. Several of the Debtors’ most popular games, including such critically acclaimed andextremely popular titles as
Saints Row
,
Darksiders
and
Company of Heroes
, are based onintellectual property that is wholly-owned by the Debtors and developed by their internal studios.The Debtors also have a number of game titles, including the
Metro
and
Homefront
titles, thatare original to the Debtors but are developed by third party, external developers. Finally, theDebtors also develop and distribute several games pursuant to exclusive intellectual propertylicenses from third parties, such as
World Wrestling Entertainment
and
South Park
.6.
The Debtors operate their business globally through various domestic and foreignsubsidiaries and studios. Generally speaking, upon information and belief, THQ, Inc. and/or its
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domestic subsidiaries own THQ’s intellectual property and are party to THQ’s valuableintellectual property licenses. THQ’s foreign subsidiaries market and distribute THQ’s games todirect-to-retail customers and through distributors to over 80 territories outside of the U.S. Upon information and belief, cash generated by THQ’s foreign operations is held by THQ’s foreign subsidiaries and “upstreamed” to THQ, Inc. (such subsidiaries’ ultimate parent entity) (by means of intercompany loans rather than corporate dividends).
II. C
HANGE IN
D
EBTORS
’
M
ANAGEMENT AND THE
C
ENTERVIEW
S
ALE
“P
ROCESS
”
7.
In late May/early June 2012, Jason Rubin (“Rubin”) and Jason Kay (“Kay” and,together with Rubin, the “Jasons”) began a process orchestrated to take over the Debtors andcapture, for themselves, the significant “upside” value in the Debtors’ business. The Jasons aretwo highly experienced and successful “gaming” industry entrepreneurs and understand thevalue that can be achieved from successful game and entertainment franchises, particularlywhere there exists the potential for significant “hits” or successful games, which plainly existshere.8.
Promptly after the Jasons “took over,” they immediately began to bring in theirown “team” and phase out key members of former management. On June 11, 2012, less than two(2) weeks after the Debtors hired Rubin, the Debtors engaged Centerview Partners, LLC(“Centerview”) “with the primary goal of finding an investor that would provide new liquidity tofund the Debtors’ business plan, or a buyer for substantially all of the Debtors’ assets….”
See Declaration of Brian Farrell in Support of the Debtors’ Chapter 11 Petitions and Requests for First Day Relief
[Docket No. 2], ¶ 41. Upon information and belief, Centerview had a pre-existing relationship with Rubin, apparently having “backed” him in prior transactions. In June
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2012, the Debtors did not publicly announce their retention of Centerview or that they wereseeking financing and/or a third party purchaser for any of the Debtors’ assets.9.
During August and September, 2012, Centerview and the Debtors’ managementbegan a so-called marketing “process” focused on finding an investor to either: (i) fund theDebtors’ business plan or (ii) acquire the Debtors’ entire business (as a whole). During this“process,” the Debtors and their advisors focused their attention on contacting “growth-oriented”financial investors (i.e., venture capital and private equity firms) and, by marketing the companyas a whole, effectively precluded strategic investors from participating in a sale process. Thefinancial investors that the Debtors and their advisors did approach included only a few firmsknown for “distressed” investing, which likely further hindered the process.
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10.
In addition, the Debtors limited the process to exclude “title-by-title” sales andinformed potential investors that any transaction the Debtors would consider would (i) trigger a“fundamental change” (i.e., a sale of the entire business) and (ii) require that the Debtors’management retain their positions with the Debtors. These conditions were imposed by theDebtors notwithstanding that purchasing individual game titles is known to be attractive tostrategic buyers in the Debtors’ industry. Among other things, “piecemeal” sales (i) avoid theneed for purchasers to acquire duplicative functions and incur related corporate overhead and (ii)allow buyers to acquire complementary titles while leaving behind undesirable ones. In fact whatthe Debtors’ “sale process” did accomplish was to simply confirm that no strategic parties wouldbe interested in the company in its existing configuration. As a result, the only way to run a value
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Houlihan Lokey Capital, Inc. (“Houlihan”), the Convertible Committee’s pre-petition financial advisor,understands that, of the financial investors the Debtors and their advisors approached, only a few were “distress-oriented” funds (one of which was Clearlake).
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maximizing sale process would be to allow marketing of the company on a “title-by-title” basis.The Debtors’ refusal to consider any “title-by-title” transactions is particularly telling because itis Houlihan’s understanding that the Debtors have received unsolicited interest in certain titlesand franchises in the past, including after the announcement of the bankruptcy proceeding.
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11.
On October 26, 2012, the Debtors and Clearlake agreed to the terms of a deal. Assoon as it became clear that Clearlake was interested in purchasing the Debtors “as a whole,” asdescribed below, it appears that THQ’s management and Centerview set the wheels in motion tomanufacture a liquidity “crisis” which culminated in the Debtors’ chapter 11 filing and theexpedited Bidding Procedures Motion.12.
First, during October 2012, the Debtors promptly revised their financial projections to reflect that the Debtors required more cash than they had previously projected.
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Next, in early November 2012, THQ announced that the Debtors intended to defer three (3)critical game releases that were integral to the Debtors’ ability to meet their revenue requirements. THQ also, at this time, first announced that it had engaged Centerview to explore financing and restructuring alternatives. THQ, however, did not disclose that it had signed a deal with Clearlake.13.
On November 7, 2012, the Debtors’ secured lenders, Wells Fargo, sent a letter to the Debtors alleging that the Debtors were in default under their secured credit facility as a result of the Debtors’ purported failure to comply with certain covenants under the governing Wells
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That strategic investors may be interested in purchasing individual titles is supported by the fact that Houlihan hasreceived significant interest in individual assets and titles from various strategic investors.
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The timing of this revision is important. It occurred well before any of the various purposed “liquidity problems”the Debtors now claim caused their bankruptcy filing and thus belies the Debtors’ claims that these problems“forced their hand.”
THQI Noteholder Objection
this guy.
Whatever they will be working on will most likely be for next-gen, so I can't wait to see what they cook up.
