John Paulson Caught In Bidding War Over Bankrupt Telephone Directory Maker

Billionaire investor John Paulson recently announced that he is willing to invest $200 million to purchase up to 45% of the post-reorg new common stock in bankrupt telephone directory maker Idearc. Even though Paulson previously owned a substantial portion of Idearc's prepetition debt which converts into roughly 13% of pro forma equity per the Plan of Reorg, his holdings would be capped at 45% (essentially a net outflow of $142 million for the 32% which would be acquired). So what was supposed to be a simple hunt in the back pocket for loose change for a transaction that leaves a few people puzzled as to what value the billionaire contrarian sees in a business model that is rapidly eaten away by Google at both the national, and increasingly more, the regional and city levels, just got a little more complicated. Yesterday Bennett Management Corp decided to outbid Paulson, by notifying the debtor that it was "willing to pay a significantly higher price" of $220 million for the same equity stake, and that also the estate would end up getting a much greater actual cash inflow as BMC only owns 1% of post-reorg equity cuirrently.

BMC is also arguing against the proposed Paulson plan on the grounds that the hedge fund has not been aggressive enough in marketing the Idearc stock before announcing its debtor-accepted bid.

The Debtors have failed to present any evidence that they have adequately marketed the New Common Stock. In fact, the Debtors cannot demonstrate that the proposed sale at the current price is in the best interest of the estate or that the New Common Stock is being purchased for the best value, particularly given the fact that the BMC Purchasing Funds have expressed an interest in purchasing the New Common Stock at a significantly higher price.

The Debtors have not articulated a logical business rationale for refusing to pursue a higher offer from a party that is poised to purchase the New Common Stock at a significantly higher price than that offered under the transaction currently proposed by the Debtors.

The question what the 1251 Ave of the America based hedge fund (it is convenient that Paulson has gone down the distressed road. It is doubly convenient that his floor is connected to restructuring powerhouse Rothschild merely by a staircase) sees in Idearc in the first place is a good one. Yet $200 million for Paulson is simply capital that has to be put to some use (the alternative: buying 100 HFT trading systems and making $100 trillion dollars in this no volume, high vol, predatory algo driven market, is almost like shooting fish in an excess liquidity barrel). Perhaps with a cleaned up balance sheet Idearc does in fact have some equity value, although like Blockbuster, Movie Gallery and Bank of America, this is merely another melting ice cube as quantized information become infinitely commoditized. It will be interesting to see what Mr. Paulson ends up doing with this particular investment, and whether, he will in fact even overbid Bennett (and how far any bidding war may go).

Bennett filing below:

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bennett idearc 2.pdf	670.33 KB