High noon for bankrupt Horsehead
Shareholders of Horsehead Holdings face off with the bankrupt Robinson zinc producer’s creditors this week over a reorganization plan that would render the company’s shares worthless.
When the hearing begins Tuesday morning in U.S. Bankruptcy Court in Wilmington, Del., the main issue will be how much Horsehead is worth. Shareholders say the creditor group, headed by hedge fund Greywolf Capital Management of Purchase, N.Y., is low-balling the value in order to acquire the company at a discount and make a quick profit once Horsehead’s new shares reflect the company’s true value.
The creditor group has controlled Horsehead’s reorganization because of the amount of the company’s debt they owned when Horsehead filed for bankruptcy Feb. 2. They want to reorganize the company by issuing new shares to creditors. Current shareholders would get none of the new shares under the proposal.
Court documents indicate Greywolf may have the right to appoint three of the six members of the reorganized company’s board.
Creditors have the opportunity to vote the reorganization plan up or down. It also must be approved by U.S. Bankruptcy Court Judge Christopher Sontchi.
There is a significant difference between each group’s estimate of what Horsehead is worth.
The creditor group values the company at $255 million to $305 million. Shareholders, who say potential bidders offered substantially more than that in December for pieces of the company, estimate Horsehead’s value at between $770 million and $850 million.
Horsehead’s idled zinc plant in Mooresboro, N.C., is a wild card when it comes to valuing the company.
Built at a cost of more than $550 million, the plant was idled in January after massive cost overruns and equipment problems that kept it operating far below its planned capacity. The company took a $528 million impairment charge to reflect the plant’s debilitated status.
Horsehead’s financial statements leading up to the bankruptcy added fuel to the shareholders’ argument and prompted lawsuits by some shareholders. Its initial bankruptcy
filing listed liabilities of $544.7 million and assets of $1 billion.
One of the shareholder lawsuits, filed in federal court in Delaware, alleges that misleading statements by CEO Jim Hensler, CFO Robert Scherich and senior vice president Gregory Belland caused investors to buy Horsehead shares at inflated prices. Those investors say the reorganization plan would prevent them from collecting damages of up to $300 million from the three executives.
Mr. Scherich announced July 28 that he is leaving the company as of Wednesday.
Northeast Investors Trust, which owns about $2.5 million of Horsehead’s secured debt, also opposes the plan, which was modified in order to gain broader support among creditors.
In court papers, Northeast Investors said that while the original plan gave all secured creditors the opportunity to invest in the stock of the reorganized company at discount prices, the amended plan limits those rights to the creditor group proposing the plan and its affiliates. The Greywolf group would be able to purchase at least 63 percent of the reorganized company’s shares at discounted prices, Northeast Investors’ said in a court filing.
“This is a textbook example of unfair discrimination,” they wrote, adding that the amended plan “clearly runs afoul of the bankruptcy code.”
To counter what they believe is a conspiracy to seize Horsehead at a discounted price, the shareholder group has tried to find investors willing to pay more for the company’s assets. They hope an increase in zinc prices since the bankruptcy will stimulate more interest in the company and its prospects. The more bidders are willing to pay for the company, the greater the chances there will be something left for shareholders after creditors are paid off.
Bidders were to submit offers by Friday.
When publicly traded companies go bankrupt, shareholders are usually left high and dry. Hopes that Horsehead will be different have driven the company’s stock price as high as 56 cents since they were priced at 6 cents the day after the bankruptcy was announced. Perhaps this week’s courtroom drama will provide a better idea of what they are really worth.