80-year-old co-op avoids liquidation, economic damage
In February 2009, the CEO of Humboldt Creamery, an 80-year-old Northern California milk cooperative, resigned abruptly, leaving the rural community in which it operated shocked and stunned. In an instant, the creamery went from what was perceived to be a flourishing enterprise to a company whose very existence became uncertain and threatened.
Six months later, the creamery’s assets were sold in a Section 363 bankruptcy sale for far less than the $80 million to $100 million the cooperative members thought it was worth, but nevertheless avoided a potentially devastating liquidation and economic blow to the already depressed region. When all was settled, fewer than a dozen jobs were lost, cows continued to be milked, generational families stayed intact and a community remained hopeful.
The Humboldt Creamery case is an excellent example of how a team of restructuring, bankruptcy and investment professionals came together under a committed board of directors to handle a crisis and stave off a disaster. It also demonstrates how a time-proven five-step process can lead managers, investors and lenders in a crisis from a set of carefully considered alternatives to an optimal solution.
Step one – situation analysis
Humboldt Creamery had grown from a local enterprise to an iconic marketer of milk products with $130 million in sales in 2008. When the former CEO resigned, he pointed to irregularities in the company’s financial reports that accumulated from many years of attempting to make the company appear better than it actually was. At that moment, there was no certainty that the company was viable or that it could continue in its previous form, if at all.
As with nearly every restructuring engagement, the first step was to determine whether there was a viable core business and the resources to implement a turnaround. This analysis showed that the creamery was deeply insolvent and the novelty products produced in its Los Angeles facility were not worth saving. However, the milk and ice cream products produced in its Ferndale facility were profitable and the enterprise value of, its Ferndale operations substantially exceeded its liquidation value.
Step two – management change
Virtually every study of corporate failure points to management as the probable cause of distress and most likely key to recovery. The goal of the restructuring adviser is to ensure that capable management remains and those who caused the failure or impede the turnaround are removed.
In the case of Humboldt Creamery, the board quickly elevated the creamery’s COO, an effective and respected leader, to interim CEO.
Step three – emergency action
After confirming the existence of conditions for a turnaround, restructuring teams will typically implement emergency actions to ensure short-term survival, and this often includes laying the groundwork for a possible bankruptcy. In the Humboldt Creamery case, the dairy farmer cooperative that depended on the creamery agreed in an emergency meeting to defer $2 million of milk payments to buy time.
Forbearance discussions were initiated with the creamery’s secured lenders, and interviews with qualified bankruptcy attorneys commenced. The creamery retained bankruptcy counsel, and in April 2009, it filed for Chapter 11 Bankruptcy in the Northern District of the U.S. Bankruptcy Court in Santa Rosa.