Private equity J.C. Flowers & Co. has dropped out of the bidding for the futures brokerage unit of bankrupt Refco Inc., the firm’s lawyer told a bankruptcy hearing Monday.
The move came after Dubai Investment Group LLC, the investment arm of Dubai’s government, and billionaire Ronald Burkle’s U.S. buyout firm Yucaipa Cos. submitted a joint bid of about $828 million for Refco’s most sought-after asset.
That topped an offer of $768 million from a group led by Flowers that was struck more than a week ago and a second bid worth about $790 million received from U.S. broker-dealer Interactive Brokers Group five days ago.
Lawyer James Sprayregen said Flowers was withdrawing its bid after a bankruptcy judge said he would only approve of a sale agreement with Flowers if a break-up fee was lowered to $5 million from over $20 million and the expense reimbursements lowered to $1 million.
The head of J.C. Flowers, former Goldman Sachs banker Christopher Flowers, who was present at the hearing, declined to comment.
Rival brokerage firm Man Financial, part of UK hedge fund Man Group Plc., and Marathon Asset Management LLC also registered their interest in Refco’s futures unit, according to filings in U.S. bankruptcy court. Sources said U.S. private equity firm Apollo Management LLC was also interested.
Judge Robert Drain said the emergence of the new bidders meant it was no longer so urgent to speed through a sale of the unit to Flowers, which made its bid after being approached by Refco, the largest independent U.S. futures and commodities broker, as it spiraled into bankruptcy.
“I understand the moral commitment to (J.C. Flowers),” Drain told a courtroom packed with about 100 lawyers on Monday, adding the court recognized the value that Flowers’ swift bid had provided.
“(But) there are improved prospects, as opposed to worse prospects, than when we were at the start of this case.”
The New York-based company began disintegrating as its Chief Executive Phillip Bennett was charged with securities fraud over hidden debt. The scandal shook some clients’ faith in the brokerage, spurring them to pull their assets.
Drain asked Refco to consider adjusting its deal with Flowers. The new bids could generate more money for Refco’s creditors who are owed more than $16 billion.
Appeal for speed
But Refco’s lawyer, Gregory Milmoe, of Skadden, Arps, Slate, Meagher, & Flom, said if the sale process did not proceed quickly, Refco’s business ran the risk of eroding “to the point where we won’t have anything to sell.”
Milmoe said customer accounts at Refco’s futures business have fallen to $3.4 billion from $4.1 billion since last week.
However, the bankruptcy court heard a flood of objections to Refco’s proposed process to sell its futures trading arm to the Flowers’ group with a breakup fee of 2.8 percent.
The objections ranged from concerns about the breakup fee, whether the unit would be sold to the highest bidder, and Refco’s push to seal a fast deal for its futures unit which includes Refco LLC, UK-based Refco Overseas Ltd, and Refco Singapore. None of these units have filed for bankruptcy.
Man Financial, the futures brokerage unit of Man Group that had taken itself out of the bidding last week, said in a court filing that it could be a bidder for all or part of Refco’s futures brokerage business, Refco LLC.
But Man objected to the way the Refco unit is being sold, saying the proposed bidding procedures “significantly impeded” its ability to bid and make its highest and best offer.
Marathon Asset Management, which is a creditor and a potential bidder either alone or with others, said: “The bid procedures impose a significant financial penalty on prospective bidders and the estate.”