Distressed m&a is the “new normal” in Chapter 11 cases, as noted here and elsewhere. Two large media marketing and advertising companies, SuperMedia and Dex One, took the “new normal” to new extremes last week by filing simultaneous and coordinated “prepackaged” Chapter 11 cases in order to complete a merger of their businesses.
Both SuperMedia and Dex One are direct descendants of Yellow Pages publishers that have struggled to transition to the age of digital information. Each one has gone through a previous Chapter 11 case. SuperMedia, formerly known as Idearc, was spun off from Verizon in 2006 and emerged from its first bankruptcy in 2009. Dex One, the former R.H. Donnelly Corporation, also went through Chapter 11 during that same period and completed its reorganization in 2010. The new company, to be known as Dex Media, hopes to have the size and resources to better compete against Google and other companies that dominate the digital media landscape.
The companies agreed to merge last year, but both needed to make changes to their existing loan agreements which required 100% consent from their respective lenders. “Prepackaged” bankruptcy cases are often used in such situations. Companies seeking to do transactions which require unanimous or near-unanimous approval of lenders or bondholders can utilize the plan voting provisions of Chapter 11 if they fall short of obtaining the necessary support. A Chapter 11 plan must be supported by each class of impaired creditors (a plan class being a similarly situated group of creditors, such as secured lender claims or unsecured trade creditor claims) by a vote of half in number and two-thirds in claim amount. Accordingly, a restructuring company that falls short of what is needed under its applicable loan agreements or indentures can, by minimizing the number of impaired creditor classes (e.g., by continuing to pay all trade and vendor claims in the ordinary course of business), negotiate with the specific class of lenders whose approval is required in order to make sure that it will have the necessary votes for Chapter 11 purposes.
This is exactly what SuperMedia and Dex One have done. Each failed to get the necessary 100% approval of their senior lenders, but had far more than enough support to gain approval of Chapter 11 plans. In true “prepackaged” cases, as here, the plan of reorganization is voted upon and approved by the requisite number of creditors prior to the filing of the cases. Ideally, all that remains is the approval of the bankruptcy court.
The process obviously entails no small number of risks, beginning with the opportunity for disgruntled parties to appear in the Chapter 11 case and cause delays. Those risks are multiplied for SuperMedia and Dex One, because a snag in the expedited plan confirmation process in one case will invariably reverberate in the other. The two debtors’ respective professional advisors will need precision, coordination and some degree of luck to complete this transaction by the contemplated late April plan confirmation date.