A stalking horse bid is a strategic, pre-arranged initial bid made by a chosen buyer during a bankruptcy or distressed asset sale. This bid sets a minimum purchase price, ensuring the asset is not sold below fair market value and encouraging other competitive bids.
How It Works
- Pre-Selection – A seller or bankruptcy court selects a qualified buyer (the stalking horse).
- Initial Bid – The stalking horse submits a baseline offer for the assets.
- Due Diligence – The stalking horse performs thorough review and negotiates terms in advance.
- Auction Launch – Other buyers can submit higher offers in a competitive bidding process.
- Bidder Protections – If outbid, the stalking horse usually receives:
- Breakup Fee – Compensation for setting the floor.
- Expense Reimbursement – Covers due diligence costs.
Applications in Real Estate
- Common in distressed property and portfolio sales during bankruptcy proceedings.
- Ensures asset value preservation and promotes a transparent auction environment.
- Used to attract additional buyers by validating asset pricing.
Why It Matters
- For Sellers: Establishes a fair minimum value and reduces risk of lowball offers.
- For Buyers: Offers negotiation leverage and bid protections.
- For Markets: Adds structure and competitiveness to distressed asset sales.
Example Scenario
A bankrupt property owner seeks to sell a $10M apartment complex. A stalking horse bidder agrees to buy it for $10M with negotiated terms. The auction opens, attracting higher bids. If another buyer offers $10.5M and wins, the stalking horse receives a breakup fee.
FAQs
- Why is it called a “stalking horse”?
The term comes from hunting, where a decoy (the stalking horse) conceals the hunter’s approach. Here, it refers to the initial bid setting the stage for others. - Is the stalking horse always outbid?
No. They may win the auction if no better offers emerge. - Is it only used in bankruptcy?
Primarily, but the model can apply to other distressed or structured asset sales.
Summary
A stalking horse bid is a valuable tool in bankruptcy and distressed asset sales, especially in real estate. It establishes a minimum price, encourages higher offers, and offers the initial bidder protections—benefiting sellers, buyers, and the overall auction process.
