Sam Kane Beef Processors – Court Approves Sale of Assets to Hilcorp Affiliate JDH Capital

February 14, 2019 – The Court hearing the Sam Kane Beef Processors case issued an order [Docket No. 137] approving the sale of substantially all of the assets of the Debtor to (the “Assets”) to JDH Capital Company (“JDH”) a subsidiary of Hilcorp (the largest privately held independent oil and gas exploration/production company in the U.S) for $1.5mn in cash and the assumption of certain liabilities including the Debtors’ $6.5mn loan from Rabo AgriFinance, LLC (“Rabo”) [Docket No. 49].

On February 8, the Debtors placed a $28.0mn value on the JDH purchase price, which included a $20.0mn cash injection to “resume operations as soon as possible and provide ongoing environmental and operational capex, working capital, and other operating expense.” Although there is no specific reference to the $20.0mn in the draft asset purchase agreement between the Debtors and JDH (approved by the Court, signed by Hilcorp and attached to the order), there is every indication that the purchase of the Debtors is on a going concern basis and that JDH intends to fund the business going forward, with a portion of the $1.5mn in cash earmarked for the payment of immediate operational expenses in addition to some outstanding taxes.

As we previously reported, “Significantly for the Debtors, the Debtors’ 750 furloughed employees and the Debtors’ many beef suppliers/feeders, the proposed purchase is for substantially all of the Debtors’ assets. Following the collapse of a deal with a prospective stalking horse bidder, and facing an urgent need to press forward with an auction, the Debtors had offered to sell the Debtors’ assets quartered, even asking Court permission to abandon rump, unsold assets.  The bid of JDH , who is looking to be the Debtors’ fourth owner in six years, is subject to a number of conditions including (i) commitments from Texas feeders to resume relationships with the Company, (ii) a green light in respect of outstanding environmental issues, (iii)  the agreement of current acting CEO Chris Daniel to stay on at SKB and (iv) the release of existing liens held by Marquette Transportation Finance, LLC (“Marquette”).

The Company, which has operated a meat-packing plant in Corpus Christi, Texas since 1949 (see “God Bless America” and “People Love Beef” below), filed for Chapter 11 protection on January 23, 2019 listing estimated liabilities of  between $50mn and $100mn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) Marquette Commercial Finance ($47.6mn), (ii) Luckey Custom Feedlot ($5.8mn) and (iii) Carrizo Feeders ($4.2mn).

Who is JDH Capital or “Did SKB’s Cowboy Way of Life Just Get Rescued by a Polo-Playing Billionaire Philanthropist”?

In what has been a case of corporate mistaken identity, reports have indicated that the winning bidder in the Sam Kane Beef auction was a North Carolina company with a similar name. BankruptcyData was the only source to correctly determine that the purchaser was in fact affiliated with Houston-based Hilcorp with which JDH apparently shares Houston offices (see our February 8, 2019 story on how we correctly deduced the purchaser). Hilcorp was founded by polo-playing, billionaire, philanthropist Jeffery D. Hildebrand (ie JDH). Hildebrand’s philanthropy includes significant support of the Houston Zoo, the Contemporary Arts Museum Houston and Texas A&M’s Hildebrand Equine Complex. It is fairly easy to surmise that the importance of SKB to a cowboy way of life may have ultimately influenced the purchase of SKB by Hilcorp and its horse-loving Chairman; the ownership of a beef packaging business seemingly falling outside of the purely strategic interests of an energy giant. 

If Hildlebrand is, as it appears, the mysterious “financial backer” named in Court documents, SKB employee’s are likely to feel reassured, Hilcorp has been included on Fortune Magazine’s 100 Best Companies to Work For list in 2013, 2014 and 2015. According to Fortune, in December 2015, Hilcorp gave all 1,380 employees a $100,000 Christmas bonus. 

Furloughed employees will be further heartened by the comments of Judge Richard Schmidt, SKB’s Court appointed receiver, who noted on the return of employees to work, “It will be a gradual process, but it will be a very rapid one where they’re brought on and back as employees. The HR department is there and they are working on a plan to bring everybody back.”

Events Leading to the Chapter 11 Filing

As is the case with many, non-prepackaged Chapter 11’s, SKB’s Chapter 11 filing was preceded by sudden events that left the Company with little or no choice but to file. In SKB’s case, those events were (i) the receipt of a notice that the Company was in violation of waste water treatment regulations, which threatened SKB’s ability to maintain operations and (ii) notice from a finance source, Marquette, that funding, necessary for cattle purchase and operations, was not assured. Absent that assurance, cattle suppliers, cognizant of a recent history of bill payment problems on the part of the Company, refused to supply further cattle.

For cattle suppliers this was a difficult moment, on the one hand SKB is a key processing facility with no nearby alternatives; on the other hand SKB has a recent history of being a poor partner, especially when it comes to all-important payment issues. Commenting on the importance of SKB to the industry, Lou Waters, Jr., a cattle rancher from Houston who purchased SKB in 2013 and sold it in 2015, said “Well, this plant is a key link in the beef business in South Texas….It’s the only plant that processes beef for the feeders down here, and if this plant were to close, the entire industry would close with it in the southern half of Texas.”

In the Spring of 2016, the United States Department of Agriculture began an investigation of SKB related to purported violations of the Packers and Stockyards Act of 1921, as amended (‘PSA’ or the ‘Act) which requires ‘packers, like SKB, to pay promptly for livestock purchased for slaughter. As a result of an investigation, and persistent failures to remedy payment practices that were found to be in violation of the Act, ultimately the U.S. Government sued for the appointment of a receiver, with that appointment being made on October 5, 2018. The payment issues have been both large and persistent with the Schmidt declaration noting, 

38 days is a long time in respect of the PSA’s prompt payment regulations and the commercial realities of selling a perishable good like beef [a Court filing somewhat ironically underlining the “emergency” nature of SKB’s need for Court bankruptcy protections when noting, “The nature of the Debtor’s operations is such that, if the processing of the slaughtered beef is not completed in a timely manner, the product may spoil and become worthless”], so it is easy to imagine cattle suppliers taking issue with effectively waiting for payment until after SKB has in all likelihood collected payment for processed and packaged beef.

“God Bless America” and “People Love Beef”

SKB was founded by Sam Kane (born Kanengiesser in Spisske Podhradie, Czechoslovakia), a one-time rabbinical student turned resistance hero, almost completely by chance. In 1949, on his way out of town in search of greener pastures, the then plumber’s assistant took some advice from a ticket agent at the bus terminal, “Check out the vacancy for butcher at the grocery store.” The rest of Sam’s life became Texas-sized legend for the Czech resistance fighter who at 98 lbs once gnawed at a cowhide he found in the snow and survived two years fighting the Nazis while losing his entire family to the holocaust. Kane, who went from gnawing cowhide to owning one of the world’s largest meat packers lived by two simple mottoes, “God bless America” and “People love beef.”

In May 2013, the business (then managed by Sam’s son Jerry Kane; Sam lived into his 90’s) was sold to a group of Texas ranchers and cattlemen who subsequently onsold SKB to its current owners, a subsidiary of South American dairy operator The Fernandez Group, in December 2015.

Further About SKB

The Debtor’s 238,186 square foot facility in Corpus Christi is considered the hub of the South Texas beef industry. The Debtor’s facility is capable of processing 1,200 head of cattle per shift, or approximately 8,400 head of cattle per week. In 2017 alone, the Debtor processed 204,000 head of cattle, and production increased to 324,000 head in 2018. Due to its large commercial scale capabilities, the Debtor’s Facility has appraised value of approximately $55.6 million, and an estimated replacement value of $100 – $150 million. In the fourth quarter of 2018, the Debtor had working capital assets of approximately $25 million in accounts receivable and $10 million in inventory.”