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Paper Source, Inc – Court Approves $91.5mn Sale of Debtors’ Asssets to Elliott Investment Management Affiliate; Elliott Will Look for Synergies with Barnes & Noble, Acquired in September 2019


May 13, 2021 – The Court hearing the Paper Source, Inc cases issued an order approving the $91.5mn sale of substantially all of the Debtors’ “premier paper and gift store” assets to Papershop HoldCo Inc. (the “Purchaser,” an affiliate of Elliott Investment Management L.P. or “Elliott”) [Docket No. 486]. The asset purchase agreement (“APA”) governing the terms of the sale is attached to the order as Exhibit 1.

In a May 11th press release, Elliott stated, “The acquisition of Paper Source by Elliott allows the stationery and gift retailer to emerge from Chapter 11 with the support of a well-capitalized owner committed to the development and growth of the business. Following the Chapter 11 process, Paper Source will benefit from significantly less debt on its balance sheet. It will operate from approximately 130 stores across the US, from Papersource.com, as well as its wholesale division, Waste Not Paper by Paper Source.

Elliott is also the owner of Barnes & Noble, the leading bookseller in the US with bookstores in every state. The businesses are highly complementary, with shared product ranges and a common commitment to excellent customer service. While the businesses will continue to operate independently, considerable opportunities exist for mutually beneficial retail partnerships.

Barnes & Noble has enjoyed a strong performance since its acquisition by Elliott in September 2019, overcoming a number of pandemic-imposed challenges. Elliott now looks forward to the continued progress of both retailers. James Daunt, CEO of Barnes & Noble, will have oversight responsibilities for both companies.”


On May 10, 2021, further to (i) an April 2nd bidding procedures order [Docket No. 310] and (ii) an extension of a May 3rd bid deadline to allow the Debtors, Midcap Funding Investment XI LLC (“MidCap”) and Elliott Investment Management L.P. (“Elliott”) to further refine Elliott’s bid, the Debtors notified the Court that they had selected the Purchaser as the successful bidder [Docket No. 455]. Prepetition lender, DIP lender and stalking horse Midcap (an Apollo Capital Management affiliate) was named as the back-up bidder. The MidCap APA, which contained no bidder protections, had previously been filed at Docket No. 25.

For the Debtors a modestly improved result with MidCap's credit bid (previously assessed to be $86.8mn, comprised of $16.0mn DIP debt and $72.8mn prepetition debt) replaced by a $91.6mn bid (comprised of $40.0mn in cash and $51.6mn in new first lien term loans). 

For MidCap, not the end of their involvement with the Debtors, as they will be providing the $51.6mn of new first lien loans.  As noted below, the new deal (and its cash element) will leave the Debtors with "approximately $60 million in funded debt, a sizable cash balance, and access to a revolving credit facility to fund additional liquidity. The go-forward company will have shed significant liabilities, including over $70 million."

In a declaration in support of the Elliott sale, the Debtors' investment banker provides [Docket No. 458]. "Prior to the Bid Deadline, Elliott Investment Management L.P. (‘Elliott’) submitted a term sheet for a bid that did not qualify as a 'Qualified Bid' because Elliott proposed to finance a portion of the transaction purchase price with financing from MidCap. To provide Elliott with additional time to qualify its bid, the Debtors, with the consent of MidCap and in consultation with the Official Committee of Unsecured Creditors, agreed to extend the Bid Deadline for Elliott, while it continued to negotiate the terms of its bid and financing with the Debtors and MidCap. No other bids were received by the Bid Deadline. After lengthy negotiations, the parties reached agreement on the terms of the Purchase Agreement and MidCap’s financing of the proposed acquisition.

On May 10, 2021, following the designation of Elliott’sbid as a “Qualified Bid”, the Debtors, after consulting with the Official Committee of Unsecured Creditors, designated the Purchase Agreement as the Successful Bid and the Stalking Horse APA as the Backup Bid…

The Sale consideration to be provided by Elliott includes:

A Purchase Price in excess of $91.5 million, which consists of (i) a $40 million in cash (which would be used to repay the DIP Facility and only a portion of the Prepetition First Lien Obligations), (ii) approximately $51.6 million in the form of new first lien term loans from MidCap to the Purchaser; and (iii) the assumption of certain liabilities, payment of cure amounts, and funding of various other costs, all as set forth in the Purchase Agreement; and

Preservation of the settlement terms reached with the Official Committee of Unsecured Creditors, which includes ensuring that the estates retain (i) funding to satisfy accrued and unpaid administrative expenses that are accrued and unpaid as of the Sale closing date, (ii) up to $2.5 million to satisfy section 503(b)(9) claims, and $1.0 million for the wind down of the Debtors’ estates….

Upon the Closing, the Purchaser will have approximately $60 million in funded debt, a sizable cash balance, and access to a revolving credit facility to fund additional liquidity. The go-forward company will have shed significant liabilities, including over $70 million in secured debt obligations and significant go-forward rent obligations…”

Key Terms of the APA:

  • Seller: Paper Source, Inc.
  • Purchaser: Papershop HoldCo Inc.
  • Purchaser Price: The aggregate consideration for the Purchased Assets (the “Purchase Price”) will be:
  1. $40,000,000 in cash (inclusive of the Deposit), plus (x) an amount in cash equal to the amount of the Incremental DIP Financing (including accrued but unpaid interest thereon), plus (y) an amount in cash equal to the Excluded Cash Shortfall (collectively, clauses (w)-(y), the “Cash Portion”);
  2. $51,622,185.65 of Discharged Pre-Petition First Lien Debt as an Assumed Liability that will be permanently and immediately satisfied and discharged in full on the Closing Date pursuant to the terms and conditions set forth in the Financing Documents (the “Debt Portion”); provided that in the event that the Purchaser elects to exercise one (1) or more End Date Extensions, the amount of the Debt Portion shall increase by $21,590.50 for each day commencing with (and including) June 1, 2021 through (and including) the Closing Date; and
  3. the assumption of the other Assumed Liabilities not addressed in the preceding clause (ii) which are set forth in Section 2.3.

Key Dates:

  • Auction: May 7, 2021
  • Sale Hearing: May 13, 2021
  • Sale Closing: May 26, 2021 (per final DIP order)

Marketing Process

The Debtors' bidding procedures motion notes that the decision to file for Chapter 11 followed a prepetition marketing process that revealed that potential bids would not exceed amounts outstanding under their prepetition First Lien Facility and that many potential bidders were not willing to move forward with an out-of-court sale process.

The motion states, “The Debtors believe that the proposed Bidding Procedures and corresponding timeline will allow the Debtors to build off the significant progress made prepetition to market and sell the Debtors as a going concern. Beginning in November 2020, the Debtors began working exploring a sale of all or substantially all of the Debtors’ assets. Their investment banker distributed teasers to potential acquirers starting on December 11, 2020 and began distributing more substantive materials starting on December 20. As part of that sale process, their investment banker reached out to approximately 138 potential buyers — 10 strategic buyers and investors, who were selected based on their business model, historical acquisition activity and financial capabilities, and 128 financial buyers and investors, who were selected based on their historical interest in retail, consumer and branding opportunities, existing and past investment and financial capabilities. Approximately 65 of those institutions executed non-disclosure agreements and received a 'confidential information memorandum' and other information containing business and brand overviews, product positioning, management team information, channel overviews, customer demographics, strategic plans, growth opportunities and historical and projected financial information.

Despite this robust marketing process, by late January 2021 it became clear that the sales process would not generate any bids in excess of the amount of the Prepetition First Lien Facility. While out-of-court options were discussed with potential buyers, most potential acquirers contemplated effectuating any transaction through a chapter 11 proceeding to address the Debtors’ significant lease liabilities. Based on the results of the prepetition marketing process, feedback from potential acquirers and discussions with both the Debtors’ lenders and their advisors, the Debtors determined to pursue a section 363 sale in connection with a chapter 11 filing. Since making this decision, the Debtors and their advisors have worked tirelessly to negotiate the Stalking Horse Agreement, prepare for the filing of these Chapter 11 cases and refine sales and marketing materials.”

About the Debtors

According to the Debtors: “Founded in 1983, Paper Source is a premier paper and gift store offering a curated selection of fine and artisanal papers, invitations, gifts, gift wrap, greeting cards and an exclusive collection of envelopes and cards. With the goal to “Do Something Creative Every Day,” Paper Source is committed to offering inspiration and innovation to their customers as they celebrate all of life’s moments, both big and small. In support of this mission, Paper Source offers a creative aesthetic with a unique color palette and proprietary designs that are hand-illustrated by an in-house Art and Design team. As of early 2020 [i.e. before Papyrus purchase added 30 stores], Paper Source operates 135 stores nationwide, plus an ecommerce store and wholesale division.”

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The post Paper Source, Inc – Court Approves $91.5mn Sale of Debtors’ Asssets to Elliott Investment Management Affiliate; Elliott Will Look for Synergies with Barnes & Noble, Acquired in September 2019 appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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