Trident Microsystems (TRIDQ): Results of its Auction as an Example of Bankruptcy News Inefficiencies

After filing for bankruptcy, Trident Microsystems (TRIDQ) was written up as an equity investment on the Distressed Debt Investors Club (as well as VIC) earlier in the year.  For those interested in some background, here is the docket: Trident Microsystems Bankruptcy Information.  A central components of value for a possible recovery for shareholders (there has been an equity committee appointment) is the value of Trident's set top business.

Docket #14 of the case is the motion to approve the procedures in connection with the sale of the set top box business naming Entropic Communications (ENTR) the stalking horse bidder:

"The Sellers (Trident) entered into that certain asset purchase agreement, dated January 3, 2012 between the Sellers on the one hand and Entropic Communications, Inc. (the “Stalking Horse Purchaser”), pursuant to which the Stalking Horse Purchaser shall acquire the Purchased Assets on the terms and conditions specified therein (together with the schedules and related  documents thereto, the “Stalking Horse Agreement,” a copy of which is attached hereto as Exhibit B).

The sale transaction pursuant to the Stalking Horse Agreement is subject to competitive bidding as set forth herein.  Pursuant to the terms of the Stalking Horse Agreement, the Stalking Horse Purchaser has agreed to purchase the Purchased Assets for the assumption of certain liabilities and a cash payment of $55,000,000, subject to certain adjustments (the “Stalking Horse Purchase Price”)

From the Asset Purchase Agreement originally filed with the court, here is the defintion of assumed liabilities.

In bankruptcy court on January 30th, Cathy Hershcopf, counsel for Entropic Communications stated:

"We’ve got $55 million in cash, and the testimony will show today another assumed liabilities of about $18 million. So at $73 million, we see this bid protection at 6%."

So the cash value is $55M and the assumed liabilities are to be valued at $18M for $73M of value to the Trident estate.

The auction for the set top business was set to occur this past Thursday (remember that date).

This morning, Entropic Communications (ENTR) released a press statement (my emphasis added):

"SAN DIEGO, Feb. 27, 2012 (GLOBE NEWSWIRE) -- Entropic Communications, Inc. (Nasdaq:ENTR), a leading provider of silicon and software solutions to enable connected home entertainment, today announced it has been selected as the successful bidder to acquire Trident Microsystems' set-top box (STB) system-on-a-chip (SoC) assets for a purchase price of $65 million, a $10 million dollar increase to its original offer. 

Today's announcement follows the completion of an auction, and the final transaction is subject to approval of the United States Bankruptcy Court for the District of Delaware. A court order authorizing Trident to sell the STB SoC assets to Entropic is expected to be entered on or about March 6, 2012. 

"This acquisition marks an important milestone for Entropic and is an exciting new chapter in our company's history, enabling us to combine our best-in-class MoCA solutions, including MoCA 2.0, with Trident's STB SoC business to deliver a complete system solution to the world's premier cable, telco and satellite service providers, while expanding our total addressable market over the next several years," said Patrick Henry, president and CEO, Entropic. "Our successful bid brings us closer to adding Trident's complementary assets, portfolio, research and development and global presence to Entropic. We believe the acquisition brings inherent value to both organizations' customers, employees and partners, and we look forward to closing the transaction."  

Entropic expects to make employment offers to approximately 375 Trident employees worldwide. 

The transaction, which remains subject to customary closing conditions, is expected to close by the end of the first calendar quarter of 2012. Entropic will provide additional details as to the financial implications of the transaction and guidance for the combined business following the close of the transaction."

For all intents and purposes, if this was your sole source of information, you would think, as a TRIDQ shareholder, you were receiving an extra $10M in possible recovery proceeds.

This past Friday (Feb 24th) there was a hearing on Trident (i.e. a day after the auction took place).   During the proceedings, Richard Chesley of DLA Piper, which is the Debtors Counsel in the case stated (my emphasis added):

"As the Court is aware, we had an auction of the set top box assets yesterday in New York. The auction ended this morning at 2:47 a.m. in New York, and everyone made it down here on time, Your Honor. It was an enormously successful process. I think all of the creditors and stakeholders would agree to that. The value to the estates was increased by close to 40% through the competitive bidding of the two parties who were present. Because of SEC disclosure issues with respect to the prevailing bidder, they have requested that we not announce the identity of that bidder until Monday."

40% higher than the aforementioned $73M of value is a value closer to $102M.  Not the $65M value listed in today's press release from Entropic.

Here is a graph of the the three day chart of TRIDQ

You can see the value jump on the 24th when Chesley of DLA Piper noted that the value to the estates increased by 40%.  You would have had absolutely no idea what was happening with the move on the stock price unless you had called into the court on Friday.  Further, you may have been disappointed this morning with only a $10M bump in the purchase price.  Proceeds and value to the estate are very different things.  Yes, only $10M more of cash, but a nearly $30M increase in the value to the estate.  $20M of value / 183M shares is akin to 11 cents which is enormous considering a 35 cent baseline.

Disclosure:  I am long TRIDQ stock.