CTPartners’ Asset Sale Won’t Save it from Bankruptcy

June 24, 2015 – CTPartners Executive Search Inc. (CTP) has agreed to sell certain assets, but the deal probably won’t be enough to prevent the New York-based C-suite recruitment firm from seeking bankruptcy protection.

Chicago-based DHR International Inc., which is backed by private equity firm Osprey Capital LLC, has agreed to non-binding terms with CTPartners’ lenders outlining the acquisition of the search firm’s assets, including 17 offices and 250 employees, according to an internal DHR International announcement that was obtained by The Deal. Financial terms weren’t disclosed.

“We’re very excited about welcoming CTPartners employees and clients to DHR,” Geoffrey Hoffmann, CEO of DHR International, said in the June 22 announcement to employees. “This process has been performed with extensive diligence and more than 200 phone calls between employees of both firms.”

CTPartners revealed in a separate announcement released late Monday that its exclusivity period to negotiate a deal with DHR had expired late last week and that no agreement had been reached by DHR to buy CTPartners in its entirety.

The company acknowledged in the statement that DHR is seeking to buy only some of its assets, but that it would likely not provide enough proceeds to meet all of its obligations with lenders and creditors. CTPartners said it would need more funding to continue operating beyond June 30, adding that it plans to wind down its operations, which could require ceasing operations entirely or seeking bankruptcy protection.

In fact, CTPartners will likely distribute its last payroll in a week, on July 30, and file for bankruptcy the following day on July 1, according to Scott A. Scanlon, founding chairman and CEO of Hunt Scanlon Media LLC, a Greenwich, Conn.-based research firm focused on the talent management industry.

Recruiters had previously expected that CTPartners would have enough financial strength to continue operating through at least the remainder of the year, Scanlon said.

“It happened a little faster than anticipated,” Scanlon said by phone.

CTPartners’ strategic review and formation of a special committee was initially announced on Feb. 24, a couple weeks after DHR on Feb. 6 launched an unsolicited $7 per share takeover offer in a deal that valued its rival at about $61 million.

The special committee of CTPartners worked with Robert W. Baird & Co.’s Brian Cole on its strategic alternatives process, The Deal has learned.

Controversy surrounding CTPartners—-specifically, reports in December that described the company as a “boys club” and disclosed sexual impropriety and sex-bias aimed at executives, including former CEO, Brian Sullivan—- had created an opportune time for its larger rival, DHR, to pursue an acquisition.

Shares of CTPartners, which trade on the New York Stock Exchange, finished at $6.09 on Feb. 5, the day before DHR’s offer was made public. But that was much lower than what shares traded for in the fall. On Nov. 17, for

The stock has continued to deteriorate, finishing at $1.38 on Tuesday, giving the company a market capitalization of about $11.9 million

“This process took so long. They lost so many consultants,” added a source familiar with the process, requesting anonymity. “The business was in such terrible shape with the passage of time. [CTPartners] was an entirely different company by June than it was in January and February.”

Had CTPartners engaged with DHR early on, the end result would have very likely differed substantially.

In fact, activist shareholder Maguire Asset Management said in a March 20 letter that the executive search firm could be worth between $12 and $16 a share in a sale, or between about $104 million and $139 million. The Laguna Beach, Calif.-based firm at the time held an undisclosed stake in CTPartners

“The management and board made a lot of mistakes,” Maguire managing partner, Tim McGuire, said by phone on Tuesday. “I was lucky enough to sell my position. [CTPartners] dropped the ball.”

Maguire said that when he saw that DHR had reduced its stake in CTPartners to south of 5%, it signaled things were not going well.

By April, which was already a couple months into CTPartner’s strategic review, discussions between the two companies remained relatively idle despite CTPartners continuing to lose many of its top billers and influential leaders.

As of Tuesday, approximately 65 recruiters accounting for more than $75 million in billings had defected from CTPartners to competitors, according Scanlon.

“Sixty-five is too much for any search firm to bear,” Scanlon said. “Its revenues walked out the door with them.”

When your company’s assets are people, or human capital, “sometimes you don’t have the luxury of taking a whole bunch of time to figure out what to do,” added the unnamed source.

CTPartners on April 9 announced that it had obtained $12.5 million in debt financing comprised of a second-lien note purchase agreement with a publicly traded insurance company and affiliate. On May 21, the company disclosed in a Form 10-Q filing with the Securities and Exchange Commission that it had blown a covenant and essentially was left with no choice but to pursue a deal with DHR after talks between the two executive search firms remained quiet for more than three months.

It also said at the time that its credit facility had been reduced to $15.5 million from $20 million, while the interest rate has been boosted by 25 basis points to about 3.18% per annum. In addition, the holder of the notes isn’t expected to purchase a second tranche of a $6.25 million principal amount of notes, which had been scheduled to be issued after June 30.

Nonetheless, the outcome is relatively good for DHR, which will gain a significant international footprint for almost nothing.

Of the 17 offices it will inherit, about 14 are in Europe and one is in Dubai, Scanlon said. DHR will likely add about $75 million to its top line assuming the deal closes, creating a company that has more than 70 offices worldwide and north of 1,000 employees.

DHR is working with Meisrow Financial Inc.’s Jeffrey Golman as its financial adviser alongside Thomson Coburn LLP’s Thomas A. Litz and Andrew Klinghammer as legal counsel, The Deal has learned.

CTPartners CFO William J. Keneally did not return a call or email on Tuesday, while Hoffmann, the DHR CEO, wasn’t available.

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