Late last week it appeared that an investment group fronted by former Goldman Sachs partner, Christopher Flowers was first in line to purchase and salvage scandale-plagued futures brokerage, Refco from it's sudden, scandalous flat-spin into bankruptcy. But Flowers' group appears to have some stiff competition and according to the New York Times the "race" for Refco is far from over.

Race for Refco unit: One out, more in

October 25, 2005
By Jenny Anderson
The New York Times

A group of investors led by J. Christopher Flowers, a former Goldman Sachs partner, has withdrawn its bid for the futures brokerage business of Refco after a bankruptcy judge ruled that he would approve a sale only with a significantly lower breakup fee and a smaller reimbursement of fees. Flowers's action came on Monday as other bidders emerged for the Refco unit, which Flowers had sought to acquire for $768 million. Interactive Brokers Group, a broker-dealer based in Greenwich, Connecticut, offered $857.9 million, and a consortium led by Dubai's government bid $828 million.

A group that includes Merrill Lynch, Warburg Pincus and Susquehanna International Group said it would be interested in the unit and would buy it without a break-up fee but did not indicate a price. Other parties, including Apollo Management, Man Group and Marathon Asset Management, also expressed interest in the regulated entity.

The day was a significant blow to Flowers, who had emerged last week as a white knight to save the Refco unit, the largest independent futures brokerage business. A prominent name in private equity, Flowers started to negotiate with bankers and lawyers to buy the business on Oct. 14, a lawyer for Flowers's firm said. On Oct. 17, the firm, J.C. Flowers & Co., made an initial proposal to buy the regulated futures business for 103 percent of its regulatory capital, which is the amount of money that must be held by firms that deal in customer accounts.

At that time, Goldman Sachs was advising Refco on the sale, free of charge, and the Chicago Mercantile Exchange, which regulates Refco, said it would have to take emergency regulatory action by Oct. 17 if a deal were not signed.

Flowers signed the memorandum of understanding after doing only cursory due diligence, taking a risk that others might or might not have been willing to take. Greenhill & Co. signed on as advisers on Oct. 14, and the following Monday, Goldman stepped out of the deal. The parent company of Refco filed for bankruptcy-court protection later that day, leaving its regulated futures business to be auctioned as an asset.

By making the first bid, Flowers gained "stalking horse" status, meaning that he was the first bidder and that any that followed would have to make certain concessions. For that, Refco awarded Flowers's group a breakup fee of 2.8 percent of the price of the deal, or $21.5 million, and a provision to receive $5 million to $7 million in reimbursed fees. That deal was subject to the approval of the bankruptcy court, which lowered that fee to $5 million plus $1 million for expenses.

In bankruptcy court on Monday, other bidders criticized the preferential treatment that Flowers appeared to receive, contending that they had been denied access to documents and information about the Refco business. Customer assets at the business have fallen to about $3.4 billion from $7.5 billion.

"Access was not provided by the investment banks," said Jonathan Landers, a lawyer representing an investment group that includes Dubai's government and Yucaipa, an investment firm run by Ronald Burkle. "The only way we got in was through the independent directors" of Refco on Sunday, he said.

Michael Reilly, a lawyer from Bingham McCutchen representing Marathon Asset Management, a hedge fund, agreed: "There were many bidders ready that weekend; they just couldn't get in."

Early on Monday, Judge Robert Drain of the federal bankruptcy court in Manhattan questioned why potential bidders had not been given access to documents about the business and why an expedited schedule was necessary, since the value of the asset seemed to be rising, not falling. He asked that Skadden, Arps, Slate, Meagher & Flom, the law firm representing Refco, and Flowers agree to revise the submitted bankruptcy procedures.

During a lunch break, J. Gregory Milmoe, the Skadden Arps lawyer representing Refco, met with the Flowers group to revise its bid. He then met with 40 to 50 potential bidders to hear their concerns about the bankruptcy procedures. When he returned to court in the afternoon, Milmoe indicated that Flowers's group would lower its breakup fee to $15 million, its expense reimbursement to $5 million instead of a potential $7 million and a provision that requires bidders to exceed his offer by $10 million, to $1 million.

In addition, the revised document specified that all potential bidders would be given equal access to all documents. Even with those revised terms, lawyers protested the break-up fee in court, arguing that there was clearly a higher offer on the table from Interactive Brokers. That bid carries no break-up fee and no reimbursement.


NEW YORK A group of investors led by J. Christopher Flowers, a former Goldman Sachs partner, has withdrawn its bid for the futures brokerage business of Refco after a bankruptcy judge ruled that he would approve a sale only with a significantly lower breakup fee and a smaller reimbursement of fees.

Flowers's action came on Monday as other bidders emerged for the Refco unit, which Flowers had sought to acquire for $768 million. Interactive Brokers Group, a broker-dealer based in Greenwich, Connecticut, offered $857.9 million, and a consortium led by Dubai's government bid $828 million.

A group that includes Merrill Lynch, Warburg Pincus and Susquehanna International Group said it would be interested in the unit and would buy it without a break-up fee but did not indicate a price. Other parties, including Apollo Management, Man Group and Marathon Asset Management, also expressed interest in the regulated entity.

The day was a significant blow to Flowers, who had emerged last week as a white knight to save the Refco unit, the largest independent futures brokerage business. A prominent name in private equity, Flowers started to negotiate with bankers and lawyers to buy the business on Oct. 14, a lawyer for Flowers's firm said. On Oct. 17, the firm, J.C. Flowers & Co., made an initial proposal to buy the regulated futures business for 103 percent of its regulatory capital, which is the amount of money that must be held by firms that deal in customer accounts.

At that time, Goldman Sachs was advising Refco on the sale, free of charge, and the Chicago Mercantile Exchange, which regulates Refco, said it would have to take emergency regulatory action by Oct. 17 if a deal were not signed.

Flowers signed the memorandum of understanding after doing only cursory due diligence, taking a risk that others might or might not have been willing to take. Greenhill & Co. signed on as advisers on Oct. 14, and the following Monday, Goldman stepped out of the deal. The parent company of Refco filed for bankruptcy-court protection later that day, leaving its regulated futures business to be auctioned as an asset.

By making the first bid, Flowers gained "stalking horse" status, meaning that he was the first bidder and that any that followed would have to make certain concessions. For that, Refco awarded Flowers's group a breakup fee of 2.8 percent of the price of the deal, or $21.5 million, and a provision to receive $5 million to $7 million in reimbursed fees. That deal was subject to the approval of the bankruptcy court, which lowered that fee to $5 million plus $1 million for expenses.

In bankruptcy court on Monday, other bidders criticized the preferential treatment that Flowers appeared to receive, contending that they had been denied access to documents and information about the Refco business. Customer assets at the business have fallen to about $3.4 billion from $7.5 billion.

"Access was not provided by the investment banks," said Jonathan Landers, a lawyer representing an investment group that includes Dubai's government and Yucaipa, an investment firm run by Ronald Burkle. "The only way we got in was through the independent directors" of Refco on Sunday, he said.

Michael Reilly, a lawyer from Bingham McCutchen representing Marathon Asset Management, a hedge fund, agreed: "There were many bidders ready that weekend; they just couldn't get in."

Early on Monday, Judge Robert Drain of the federal bankruptcy court in Manhattan questioned why potential bidders had not been given access to documents about the business and why an expedited schedule was necessary, since the value of the asset seemed to be rising, not falling. He asked that Skadden, Arps, Slate, Meagher & Flom, the law firm representing Refco, and Flowers agree to revise the submitted bankruptcy procedures.

During a lunch break, J. Gregory Milmoe, the Skadden Arps lawyer representing Refco, met with the Flowers group to revise its bid. He then met with 40 to 50 potential bidders to hear their concerns about the bankruptcy procedures. When he returned to court in the afternoon, Milmoe indicated that Flowers's group would lower its breakup fee to $15 million, its expense reimbursement to $5 million instead of a potential $7 million and a provision that requires bidders to exceed his offer by $10 million, to $1 million.

In addition, the revised document specified that all potential bidders would be given equal access to all documents. Even with those revised terms, lawyers protested the break-up fee in court, arguing that there was clearly a higher offer on the table from Interactive Brokers. That bid carries no break-up fee and no reimbursement.

The original article appears here courtesy of the International Herald Tribune.

-- MDT

Labels: Refco