February 8, 2019 – The Debtors (or "SKB") filed a notice of winning bidder announcing JDH Capital Company ("JDH") as the successful bidder in an auction held on February 6, 2019. Rabo AgriFinance, LLC ("Rabo") a senior lender probably thrilled to avoid a winning bid, has agreed to serve as a back-up bidder.
JDH's $28.0mn consideration is comprised of (i) $1.5mn in cash to be used to settle tax obligations and make a payment to Rabo, (ii) the assumption of a $6.5mn loan made by Rabo to the Debtors and (iii) 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."
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 Cowboys Just Get Rescued by a Polo-Playing Billionaire Philanthropist"?
The Debtors have not yet filed an asset purchase agreement which is expected shortly and details as to JDH are on its face limited. Court documents state that "JDH Capital Company" is a Texas Corporation based in Houston Texas. Court documents further state that there are "over 3,000 employees in the JDH family of companies." The Court filing continues,
"JDH Capital is the investment manager of a high-net worth individual that manages certain private, controlled investments in various industries, including oil field services, power, and real estate. Purchaser has access to available funds to satisfy purchase price, required capex, and working capital needed to operate the facility."
In a declaration made by Peter Kaufman, a principal at the Gordian Group which is serving as the Debtors' financial advisor, Kaufman states that, "Gordian generally reviewed JDH Capital’s financial wherewithal (and is generally familiar with the wherewithal of its financial backer)."
Yesterday a statement was made in respect of the purchase by Ryan Connelly who identified himself as the managing director at JDH. Records also indicate that Mr, Connelly is or has been "Managing Director-Investments at Hilcorp Energy Company" which is part of Hilcorp. Hilcorp, with which JDH apparently shares Houston offices, was founded by billionaire, philanthropist and polo player 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.
If Hildlebrand is, as appears, the mysterious "financial backer," 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.
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,
“In January 2018, as a result of the late payment violations, seventy-seven (77) livestock sellers filed Packer Trust claims against SKB under the provisions of the PSA in the total amount of $142,965,561.12….On June 8, 2018, SKB, as required by the Consent Order, provided to the United States an unaudited report showing it owed $34,960,000 to livestock sellers, and that the payments to sellers were made 38 days late, on average.”
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.”