Sharper Image, Linens ‘n Things Face Auctions

NEW YORK (Reuters) – Facing the tightest credit markets in years, bankrupt companies are finding it easier to sell off assets to the highest bidder or liquidate, rather than spend years crafting a restructuring plan.

The incentives to liquidate or sell assets have grown in the last few years due to tougher bankruptcy laws and tight credit markets, restructuring experts say. It will be highlighted this week as two bankrupt retailers, Sharper Image Corp SHRPQ.PK and Linens 'n Things, face auctions for all or parts of their assets.

“Sales in Chapter 11 have become more commonplace than they were certainly 20 years ago,” said Mark Shapiro, managing director and head of Lehman Brothers Holding Inc's (LEH.N: Quote, Profile, Research) restructuring finance group. “To do a reorganization you need enough capital to survive for a long time.”

Sharper Image, which filed for bankruptcy protection in February, will hold an auction on Wednesday for its assets, including its trade name and intellectual property.

The gadget retailer concluded last month that the best route to exit bankruptcy would be to sell itself, despite already closing 96 of its 187 stores in the hope a leaner version of the retailer could have stayed afloat.

The company had hoped a new catalog would boost sales enough to propel it through reorganization, but when that failed to materialize and credit markets did not improve, it began looking for buyers, its attorney, Harvey Miller, told a Delaware bankruptcy judge earlier this month. 

A joint venture between private investment firms Hilco and Gordon Brothers, which had already partnered to liquidate the 96 Sharper Image stores, offered a bid for the company of $51.25 million, plus other considerations. That bid was approved as the “stalking horse,” meaning the joint venture will make the first bid for the company on Wednesday.

But the auction could be competitive as Sharper Image has also received a bid from a group called JWLSP Acquisition, which includes the retailer's former chairman Jerry Levin.

The retailer joins a slew of other companies that have ended up selling assets or announced plans to sell assets over the last few months, including online gift catalog site RedEnvelope Inc REDEQ.PK, Hawaiian air carrier Aloha Airlines and all-business class airline Eos Airlines.

“The idea is if you sell the businesses quickly, then you can do a liquidating plan and that doesn't take very long to do,” said Barbra Parlin, a bankruptcy attorney at Holland & Knight in New York. “But if you try to operate the business and pare it down and reorganize it in the true sense, it might take longer.”

A buyer has the opportunity to reorganize a business, but it gains the ability to reorganize outside of court where its actions are not under a microscope.

Other companies have tried to liquidate weaker portions of their businesses in an effort to raise cash.

Linens 'n Things is heading down a similar path as Sharper Image, by auctioning off liquidating rights to 120 of its “underperforming” stores on Thursday, but for now, the retailer still plans to emerge from bankruptcy protection as a going concern with its remaining 589 stores.

Companies such as retailers and airlines face particular challenges, bankruptcy experts say, because it is hard to forecast when consumers will begin shopping again, or whether oil prices will ever return to more airline-friendly levels.

“There's a lot more pressure today,” said David Heiman, a bankruptcy lawyer at Jones Day in Cleveland. 

“You may have creditors who don't want to wait forever and say you better try and sell this company, rather than wait three to four years for it to reorganize.”

Due to changes in the bankruptcy law, companies also find they are now running against a clock when they file for bankruptcy protection, Parlin said. The 2005 reforms to the bankruptcy code gave companies new time limits, including essentially an 18 month window to come up with their reorganization plan, Parlin said.

By Emily Chasan