| Merger | Merger Overview —On June 16, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BidFair USA Inc. (formerly a limited liability company known as BidFair USA LLC) (“Parent”) and BidFair MergeRight Inc., a Delaware corporation and a wholly owned indirect subsidiary of Parent (“Merger Sub”). On October 3, 2019 (the “Effective Time”), the Company completed the transactions contemplated by the Merger Agreement, and Merger Sub merged with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned indirect subsidiary of Parent (the “Merger”). Parent and Merger Sub are entities that are controlled by Patrick Drahi. At the Effective Time, each share of common stock, $0.01 par value, of the Company (“Company Common Stock”) issued and outstanding immediately prior to the Effective Time (other than shares of Common Stock owned by the Company, Parent, Merger Sub, or any of their respective direct or indirect wholly-owned subsidiaries or any other affiliate of Parent, was converted into the right to receive $57.00 in cash, without interest (the “Merger Consideration”). The aggregate cash consideration paid to Company stockholders upon the closing of the Merger was approximately $2.6 billion . As of November 8, 2019, 488,926 shares of Company Common Stock that were subject to a now withdrawn demand for appraisal rights under Delaware law remained outstanding. The holders of these shares will be paid $27.9 million in respect of the Merger Consideration in the fourth quarter of 2019. At the Effective Time, each outstanding deferred stock unit of the Company (a “Company DSU”) under the Company’s Stock Compensation Plan for Non-Employee Directors was canceled and converted into the right to receive (without interest and subject to any applicable withholding tax), an amount in cash equal to the number of shares of Company Common Stock underlying such Company DSU multiplied by the Merger Consideration. The amount owed in relation to Company DSUs totaled $11.9 million and was paid to the respective holders on October 11, 2019. At the Effective Time, each outstanding performance share unit (a “Company PSU”) that is subject to performance conditions based on the price of a share of Company Common Stock (a “Company Share Price PSU”) under the Company’s incentive plans was canceled and converted into the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal to the number of shares of Company Common Stock earned in accordance with the terms and conditions set forth in the award agreement as reasonably determined by the Compensation Committee multiplied by the Merger Consideration. The amount owed in relation to Company Share Price PSUs totaled $2.9 million and was paid to the holder on October 15, 2019. At the Effective Time, each outstanding performance cash unit (a “Company PCU”) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted PCU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal in value to the number of shares of Company Common Stock represented by Company PCUs deemed earned as of immediately prior to the Effective Time ( 125% of target for Company PCUs with a performance period ending on December 31, 2019, 100% of target for Company PCUs with a performance period ending on December 31, 2020 and 100% of target for Company PCUs with a performance period ending on December 31, 2021) multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted PCUs is approximately $1 million . At the Effective Time, each outstanding Company PSU (other than a Company Share Price PSU) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted PSU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal in value to the number of Company PSUs deemed earned as of immediately prior to the Effective Time ( 125% of target for Company PSUs with a performance period ending on December 31, 2019, 100% of target for Company PSUs with a performance period ending on December 31, 2020 and 100% of target for Company PSUs with a performance period ending on December 31, 2021) multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted PSUs is approximately $51 million . At the Effective Time, each outstanding restricted cash unit subject only to service-based vesting conditions (a “Company RCU”) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted RCU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal to the number of shares of Company Common Stock represented by such Company RCU as of immediately prior to the Effective Time multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted RCUs is approximately $3 million . At the Effective Time, each outstanding restricted stock unit subject only to service-based vesting conditions (a “Company RSU”) under the Company’s incentive plans was canceled, extinguished and converted into an award (each, a “Converted RSU”) representing the right to receive an amount in cash (without interest and subject to any applicable withholding tax) equal to the number of shares of Company Common Stock underlying such Company RSU as of immediately prior to the Effective Time multiplied by the Merger Consideration. The amount owed by the Company in relation to Converted RSUs is approximately $45 million . Each Converted PCU, Converted PSU (other than each Company Share PSU), Converted RCU and Converted RSU will (A) vest and settle on terms (including acceleration events but excluding any performance-based vesting conditions, if applicable) as were applicable to the corresponding Company equity award immediately prior to the Effective Time and (B) vest in full to the extent the holder of a converted award is subject to a qualifying termination of employment during the twenty-four (24) month period following the closing, with such converted award settled in cash as soon as practicable, but in no event later than ten (10) business days, following such qualifying termination, or such later time as required to comply with Section 409A of the Internal Revenue Code of 1986. The Company Share PSUs have already vested and were paid out as set forth above. (See Note 18 for a summary of the terms and conditions of the Company's share-based payment arrangements.) In connection with the Merger, Merger Sub (i) issued $600 million principal amount of 7.375% senior secured notes due 2027 (the “2027 Notes”) in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, and (ii) entered into a credit agreement dated as of October 2, 2019, between Merger Sub, inter alios , certain lenders party thereto and BNP Paribas, as administrative agent, and Deutsche Bank Trust Company Americas, as the collateral agent (the “Agent”), (the “New Credit Facilities Agreement”). The 2027 Notes were issued pursuant to an indenture dated as of October 2, 2019, between Merger Sub and Deutsche Bank Trust Company Americas, as trustee, paying agent, transfer agent, registrar, and notes collateral agent (the “Indenture”). The proceeds from the issuance of the 2027 Notes were used to fund a portion of the Merger Consideration ( $345 million ) and to repay a portion of the outstanding revolving credit facility borrowings under the JPMorgan Chase Credit Agreement ( $255 million ) (see Note 9). As of the Effective Time, the 2027 Notes and the New Credit Facilities (as defined below) became obligations of the Company, and the Company entered into a supplemental indenture to the Indenture (the “Target Supplemental Indenture”). Each existing material wholly-owned direct or indirect subsidiary of the Company that is organized in the U.S. (the “Initial U.S. Guarantors”) is a guarantor under the Indenture and the New Credit Facilities Agreement and, each existing material wholly-owned direct or indirect subsidiary of the Company that is organized in England and Wales, Luxembourg or Hong Kong (the “Initial Non-U.S. Guarantors”) will become a guarantor under the Indenture and the New Credit Facilities Agreement within 90 days after the Effective Time. Also in connection with the Merger, the Company entered into transactions to transfer Sotheby's Financial Services, Inc. and its wholly-owned subsidiaries to its parent, BidFair USA Inc. (the “SFS Business Transfer”). Following the SFS Business Transfer, the receivables related to the SFS loan portfolio (including those held by indirect wholly-owned subsidiaries of the Company) were transferred to a bankruptcy remote subsidiary (the "SFS Subsidiary") formed by Sotheby’s Financial Services, Inc. (the “SFS Portfolio Transfer”) and Sotheby’s Financial Services, Inc. was engaged to continue to service the portfolio of loans. The SFS Portfolio Transfer is being financed with a loan of up to $1 billion (the "SFS Loan") extended to the SFS Subsidiary pursuant to a loan agreement between the SFS Subsidiary and BNP Paribas, as administrative agent for the lenders party to such loan agreement (the "SFS Loan Agreement"). Approximately $834 million of the SFS loan was drawn on October 2, 2019 and was used to fund a portion of the Merger Consideration. The SFS Loan Agreement permits additional draws on the SFS Loan through January 31, 2020 to provide financing for the purchase of additional loan receivables by the SFS Subsidiary, and we expect to receive commitments for additional funding for loans made subsequent to January 31, 2020. The SFS Loan has a maturity date of the later of December 31, 2020 or the final maturity date of the last loan included in the SFS Portfolio Transfer. The obligations of the SFS Subsidiary under the SFS Loan are secured by the receivables and associated rights acquired in conjunction with the SFS Portfolio Transfer. The Company has provided a guarantee of the SFS Subsidiary's obligations under the SFS Loan of up to $150 million that is supported by standby letters of credit under the New Credit Facilities. Further in connection with the Merger, the Company entered into a transaction to transfer 1334 York, LLC (the owner of the York Property) to BidFair Property Holdings Inc., a Delaware corporation and a subsidiary of BidFair USA Inc. (the “York Property Transfer”). In conjunction with the York Property Transfer, 1334 York, LLC and BidFair Property Holdings Inc. entered into a $450 million asset bridge loan (the "Asset Sale Bridge Facility"), the proceeds of which were used to repay the York Property Mortgage ( $249 million ) and to repay a portion of the outstanding revolving credit facility borrowings under the JPMorgan Chase Credit Agreement ( $201 million ). The Asset Sale Bridge Facility will terminate one year following the Effective Time, subject to the right of the borrowers to extend the maturity date by six months solely conditioned upon payment of an extension fee without any further consent of the lender. The Asset Sale Bridge Facility is expected to be refinanced or extended at its maturity. In addition, as soon as commercially practical after the completion of the Merger, the Company also intends to transfer to BidFair Property Holdings Inc. the real estate holdings that collectively house its London main salesrooms, exhibition spaces, and administrative offices (the "London Properties") (the "London Properties Transfer"). Upon the completion of the York Property Transfer and the London Properties Transfer, the Company will enter into long-term, arms-length lease agreements with BidFair Property Holdings Inc. in respect of the York Property and the London Properties. (See Note 9 for information related to the York Property Mortgage and the JPMorgan Chase Credit Agreement.) The foregoing description of the Merger Agreement and the Merger is not complete and is subject to and entirely qualified by reference to the full text of the Merger Agreement, which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2019. (See the captioned sections below for information related to the 2027 Notes and the New Credit Facilities Agreement.) 2027 Notes —As discussed above, in connection with the Merger, Merger Sub issued $600 million principal amount of senior secured notes due 2027 in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. As of the Effective Time, the 2027 Notes became obligations of the Company. The 2027 Notes bear interest at a rate of 7.375% per annum and mature on October 15, 2027. Interest on the 2027 Notes will be payable semi-annually in arrears on June 1 and December 1 of each year, starting in June 2020. The 2027 Notes rank equally in right of payment with any existing or future indebtedness of the Company that is not subordinated in right of payment to the 2027 Notes, including the Company’s obligations under the New Credit Facilities. The Notes rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 2027 Notes. The 2027 Notes are effectively subordinated to any of the Company’s existing and future indebtedness that is secured by property or assets that do not secure the 2027 Notes, to the extent of the value of such property and assets securing such indebtedness. In addition, the 2027 Notes are structurally subordinated to the existing and future liabilities of the Company’s subsidiaries that do not guarantee the 2027 Notes. The 2027 Notes are guaranteed on a senior secured basis (the “Guarantees”) jointly and severally by BidFair Holdings Inc., a Delaware corporation and wholly owned subsidiary of Parent (“BidFair”), and each of Company’s existing and future material wholly-owned restricted subsidiaries organized in the U.S., and within 90 days following the Effective Time, will be guaranteed by wholly-owned subsidiaries organized in England and Wales, Luxembourg and Hong Kong that guarantee the New Credit Facilities or that guarantee certain of its other indebtedness or certain indebtedness of a guarantor (subject to certain exceptions) (collectively, the “Subsidiary Guarantors”, and together with BidFair, the “Guarantors”). The Guarantees will rank equally in right of payment to the existing and future senior indebtedness of the Guarantors, including the 2025 Notes and the New Credit Facilities, and rank senior in right of payment to any existing and future subordinated obligations of the Guarantors. The Company may redeem some or all of the 2027 Notes at any time on or after October 15, 2022, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Company may also redeem up to 40% of the 2027 Notes using the proceeds of certain equity offerings before October 15, 2022, at a redemption price equal to 107.375% , plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to October 15, 2022, the Company may redeem some or all of the 2027 Notes, at a price equal to 100% of the principal amount thereof, plus a “make whole” premium specified in the Indenture plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Indenture contains certain covenants and agreements, including limitations on the ability of the Company and its restricted subsidiaries to (i) incur or guarantee additional indebtedness, (ii) make investments or other restricted payments, (iii) create liens, (iv) sell assets and subsidiary stock, (v) pay dividends or make other distributions or repurchase or redeem its capital stock or subordinated debt, (vi) engage in certain transactions with affiliates, (vii) enter into agreements that restrict the payment of dividends by subsidiaries or the repayment of intercompany loans and advances, and (viii) engage in mergers or consolidations, in each case subject to certain exceptions. The Indenture also contains certain customary events of default. If an event of default occurs, the obligations under the 2027 Notes and the Indenture may be accelerated. New Credit Facilities —The New Credit Facilities Agreement provides (i) U.S. dollar-denominated term loans in an aggregate principal amount of up to $500 million available in up to two drawings (the “New Term Loan Facility”); and (ii) U.S. dollar-denominated revolving loan commitments in an aggregate principal amount of $400 million (the “New Revolving Credit Facility,” and together with the New Term Loan Facility, the “New Credit Facilities”). The New Term Loan Facility will mature in January 2027, and the New Revolving Credit Facility will mature in October 2024. Capitalized terms used under this heading and not otherwise defined herein shall have the meanings given to them in the New Credit Facilities Agreement. The New Credit Facilities Agreement also permits the Company to request revolving loans, swing line loans or letters of credit from the revolving lenders thereunder, from time to time from and after the initial funding date under the New Credit Facilities (the “New Term Loan Facility Funding Date”) and prior to the date that is five years from the Effective Time. Loans comprising each Eurodollar Borrowing or ABR Borrowing, as applicable, shall bear interest at a rate per annum equal to the Adjusted LIBO Rate or the Alternate Base Rate ("ABR"), as applicable, plus an Applicable Margin, where the Applicable Margin means (i) in respect of term loans (x) with respect to any ABR Loan, 4.5% per annum and (y) with respect to any Eurodollar Loan, 5.5% per annum, and (ii) in respect of revolving credit loans (x) with respect to any ABR Loan, 2.75% per annum and (y) with respect to any Eurodollar Loan, 3.75% per annum. The New Credit Facilities Agreement requires the Company to prepay outstanding term loans under the New Term Loan Facility, subject to certain exceptions and deductions, with (i) 100% of the net cash proceeds of certain asset sales, subject to reinvestment rights and certain other exceptions; and (ii) commencing with the fiscal year ending 2020, a pari ratable share (based on the outstanding principal amount of the term loans under the New Credit Facilities divided by the outstanding principal amount of all pari passu indebtedness (including the term loans under the New Credit Facilities)) of 50% of the Company’s annual excess cash flow, which will be reduced to (x) 25% if the Consolidated Net Leverage Ratio is less than or equal to 4.50 to 1.00 and greater than 3.75 to 1.00 , and (y) 0% if the Consolidated Net Leverage Ratio is less than or equal to 3.75 to 1.00 and subject to other customary deductions. Voluntary prepayments of the loans under the New Term Loan Facility are permitted; however, any prepayments on or prior to the 12-month anniversary of the New Term Loan Facility Funding Date which are either (x) in connection with a Repricing Transaction or (y) effect any amendment of the New Credit Facility resulting in a Repricing Transaction, are subject to a call premium payable to the administrative agent on behalf of the lenders of, in the case of (x) 1.00% of the principal amount of the New Term Loan Facility so repaid and in the case of (y) a payment equal to 1.00% of the aggregate amount of the New Term Loan Facility subject to such Repricing Transaction. Beginning on January 15, 2020, the Company is required to make scheduled quarterly payments each equal to 0.25% of the original principal amount of the term loans borrowed under the New Term Loan Facility, with the balance expected to be due on the January 2027 maturity date. As of November 9, 2019, the aggregate principal amount outstanding under the New Term Loan facility was $467 million , consisting of (i) $96 million drawn to repay a portion of the outstanding revolving credit facility borrowings under the JPMorgan Chase Credit Agreement ( $14 million ) and to fund a portion of the transaction costs associated with the Merger, including debt issuance costs associated with the 2027 Notes, and (ii) $370 million drawn to fund the Change of Control Tender Offer and a portion of the transaction costs associated with the Merger. As of November 8, 2019, outstanding borrowings under the New Revolving Credit Facility were $145 million and the available borrowing capacity was $105 million . . The obligations of the Company under the New Credit Facilities (i) are guaranteed, on a senior basis, by the Initial U.S. Guarantors; and (ii) will be guaranteed, on a senior basis, within 90 business days following the Effective Time, by the Initial Non-U.S. Guarantors (or, in each case, such later date as may be reasonably agreed by the Company and the Agent and pursuant to arrangements to be mutually agreed by the Company and the Agent). In addition, the New Credit Facilities will be guaranteed by each future material wholly-owned restricted subsidiary of the Company that is organized in the U.S., England and Wales, Luxembourg and Hong Kong, subject to certain limitations set forth in the New Credit Facilities documentation. The obligations of the Company under the New Credit Facilities are secured by (a) first-priority security interests in substantially all of the collateral of the Subsidiary Guarantors (other than any Subsidiary Guarantor incorporated in Luxembourg (“Luxembourg Guarantor”)) and the Company (other than any real estate, SFS-related notes receivable, and subject to certain other exceptions) which secured the Company's obligations under the JPMorgan Chase Credit Agreement (see Note 9), (b) without limiting clause (a) above, all of the equity interests (i) of the Company held by BidFair and (ii) of any Subsidiary Guarantor incorporated in the U.S., England and Wales, Luxembourg and Hong Kong held by any Luxembourg Guarantor and (c) without limiting clause (a) above, any intercompany loans (i) from BidFair to the Company and (ii) from any Luxembourg Guarantor to any other Restricted Subsidiary (together, the “Senior Credit Facilities Collateral”), provided that such Senior Credit Facilities Collateral shall be required to be delivered or provided in the case of any Initial Non-U.S. Guarantor or in the case of any Initial U.S. Guarantor with respect to assets located outside the U.S. (if any) that are required to be pledged by such Initial U.S. Guarantor, subject to certain agreed security principles, within 90 days after the Effective Time (or, in each case, such later date as may be reasonably agreed by the Company and the Agent and pursuant to arrangements to be mutually agreed by the Company and the Agent). The New Credit Facilities Agreement includes negative covenants that substantially reflect the covenants contained in the Indenture governing the 2027 Notes and, subject to certain significant exceptions and qualifications, will limit the Company’s ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional Indebtedness, (ii) make investments or other restricted payments, (iii) create liens, (iv) sell assets and subsidiary stock, (v) pay dividends or make other distributions or repurchase or redeem the Company’s capital stock or subordinated debt, (vi) engage in certain transactions with affiliates, (vii) enter into agreements that restrict the payment of dividends by subsidiaries or the repayment of intercompany loans and advances; and (viii) engage in mergers or consolidations. The New Revolving Credit Facility will include a financial maintenance covenant solely for the benefit of the lenders under the New Revolving Credit Facility consisting of a maximum consolidated net senior secured leverage ratio of the Company and its restricted subsidiaries of 6.50 to 1.0 . The financial covenant will be tested on the last day of any fiscal quarter (commencing on March 31, 2020) but solely for the purpose of the New Revolving Credit Facility only if on such day the outstanding borrowings under the New Revolving Credit Facility (other than cash collateralized or undrawn letters of credit) exceed 40% of the total commitments under the New Revolving Credit Facility. The New Credit Facilities Agreement also contains certain customary representations and warranties, affirmative covenants and events of default (including, among others, an event of default upon a change of control). If an event of default occurs, the lenders under the New Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor, subject to the Intercreditor Agreement. The foregoing description of the Merger Agreement is qualified in its entirety by the full text of the Merger Agreement, which is attached as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on June 17, 2019. For additional information regarding the Merger, please also refer to our Definitive Proxy Statement filed with the SEC on August 7, 2019. as well as our Current Report on Form 8-K filed with the SEC on October 3, 2019, announcing the consummation of the Merger. The foregoing description of the 2027 Notes is qualified in its entirety by the full text of the Indenture, which is attached as Exhibit 10.2 to this Form 10-Q. The foregoing description of the New Revolving Credit Facility and New Term Loan Facility is qualified in its entirety by the full text of the agreement for these debt arrangements, which is attached as Exhibit 10.1 to this Form 10-Q. For additional information regarding the 2027 Notes, the New Revolving Credit Facility, and the New Term Loan Facility, see our Current Report on Form 8-K filed with the SEC on October 3, 2019, announcing the consummation of the Merger. Management Changes —In connection with the consummation of the Merger, all of the members of the Board of Directors of the Company immediately prior to the Effective Time ceased to be directors of the Company at the Effective Time, and Jean-Luc Berrebi became the sole director of the Company. In addition, as of the Effective Time and in connection with the Merger, Michael Goss left his position as Chief Financial Officer of the Company, and Jean-Luc Berrebi was appointed as Chief Financial Officer and Chief Operating Officer of the Company as of the Effective Date. Mr. Goss' departure qualifies as a termination other than for “cause” in connection with a change-in-control for purposes of the Company's Executive Severance Plan, and he has received severance in accordance therewith, with his outstanding equity awards treated in accordance with the Merger Agreement, in each case, as described in the definitive merger proxy statement filed by the Company on August 7, 2019. On October 28, 2019, the Company announced that, effective immediately, Thomas S. Smith, Jr. stepped down from his position as President and Chief Executive Officer of the Company. Mr. Smith’s departure qualifies as a termination other than for “cause” in connection with a change-in-control for purposes of his Employment Agreement, dated March 13, 2015, with the Company. and he will receive severance in accordance therewith, with his outstanding equity awards treated in accordance with the Merger Agreement, in each case, as described in the definitive merger proxy statement filed by the Company on August 7, 2019. In connection with the departure of Mr. Smith, the Company announced that effective immediately, Charles F. Stewart became Chief Executive Officer of the Company. Merger-Related Expenses —For the three and nine months ended September 30, 2019, the Company incurred $4.7 million and $10.4 million , respectively, in financial advisory and legal fees related to the Merger, which are reflected in its Condensed Consolidated Statements of Operations within Merger-Related Expenses. Upon completion of the Merger, on October 3, 2019, the Company incurred approximately $38 million |
