On Background: Who Buys Distressed Assets?

Pushkin. Andy Mitchell could be called a doctor for business, but he's not the kind of doctor who does annual wellness checkups. Nope. Andy Mitchell's specialty is more alike emergency triage for very, very sick companies. You know they're bad off because of what people tend to call them at this stage, distressed Assets. Andy's firm, Lantern Asset Management, buys up businesses in immediate need of cash and willing to

I like to say, look, you know, we identify companies that have a reason to exist, and the reason they're not performing is something you can identify that that can be fixed and understood.

So you find the sick and the wounded and you try to fix them. But not all the sick in the wounded, just the sick in the wounded that they have hope.

I said, I do a lot of gap analysis, right what should be happening and what is happening? And can you tafy the gap and a type of understanding of you know, and as you know, a big part of restructuring is do people really understand where they are and where they're going? Because denial is not just a river in Egypt r. It's the easiest thing to do as a business leaders to say no, no, no, it's it's

And do the things that you buy? Are they invariably in bankruptcy or are they sometimes not that far gone?

So a lot of the companies that we get involved with are definitely troubled. The legal term bankruptcy judges like to use is you know you've entered a zone of insolvency.

Right, So if.

You're in a situation where you're unable to maintain a status quo or to realize your business plan, that's that's usually when we come in. And honestly, the one defining thing that brings us in most of time is the first thing I ever learned out of business school.

Cash is king.

So when liquidity becomes tight, that's usually when people start having to look for different solutions. If you have a lot of cash, it's amazing how long you can languish in non performance land. If you've got time and liquidity, you can work through a lot of things. But as soon as people start cutting off that lifeblood of any company, which is the cash that needs to pay its bills,

Come do what would have been the first case? And what's the first time you saw something you said, this sick and wounded business can be repaired, and I'm going to buy.

It, you know. I actually so.

I was a company called Interstate Bakeries, if you remember, they made wonderbread and Twinkies and whatnot.

And right around the.

Time that Michelle Obama correctly came out and said, hey, we need to worry about childhood obesity, they had three billion dollars of sales, but really started to have a top line issue.

What does that mean? A top line issue?

I remember I was sitting in the room the first time I met with the CEO, and of course there's a plate of Twinkies in the middle room, and he said, you want a Twinkie? I said, no, absolutely not. He goes, that's the problem, not being twinkies. So it really, you know, it was fundamental. Now, the real problem with Interstate Bakeries was actually, if you look behind the scene, they were making three billion dollars, and yet they were losing one hundred million dollars.

In cash flow.

And it's because it cost them so much to distribute their product. It was a highly unionized workforce, and the problem was is that they had grown through acquisitions, so they'd acquired something like fifty bakeries in the United States. But each time they acquired a bankruptcy, they simply adopted or absorbed the existing union contract. So when I sat down with the teamsters, even they were troubled. They said,

A top line problem that could be managed.

It had a cost structure issue that again you had to work through the unions and whatnot, but could be managed because when you looked at their competitors, you know they were doing ten fifteen percent margins and here we were at negative margins.

There's something disturbing about the idea of every time someone eats a twinkie. The company that makes it is losing money too, Like is that good for anybody? Right? I mean, they're not even making a profit off the twinkies. They're sort of subsidizing the twinkies. That's news to me. So you're so this is the first problem you deal with on your own.

Well, this is this is the first major target, you know that came up. Now, that probably was a bad one to bring up, because unfortunately it went through not only a chapter eleven, but it went through a chapter twenty two, which is the joking term in the industry for a second bankruptcy, and then finally it liquidated.

So in the end it didn't end up working.

It did not end up working.

The guys that eventually bought it basically did what had to be done, which is they shut the whole thing down, tore up all the union agreements, and then once everything was still they took the brands, restarted it and made a huge profit. But unfortunately it took using the bankruptcy code to jettison all those union agreements and everything else,

So that wasn't But that wasn't you. You didn't end up buying the Twinkie company.

No, I didn't.

Hold that thought. After a short break, we're going to hear all about a distressed asset Andy did buy, and it's distress which was considerable. We'll be right back. I'm back with Andy Mitchell, managing director of Lantern Asset Management. In this next part, I asked him about his most famously distressed asset. I want to guess what that was. Here's a clip from CBS This Morning.

In twenty seventeen, New York Times reporters Jody Kantor and Megan Twey uncovered stories of Weinstein's alleged sexual harassment, igniting the me too movement.

Let's talk about your experience buying Harvey Weinstein's company. So tell me how you stumble into that in the first place.

Well, in that one, you had a pret identifiable problem, right, which is had a management issue. Jokingly say, well, glad you get into Weinstein. It's well, they had a management problem.

So he gets charged with sexual assault. And then what happens.

When the New York Times dropped their bombshell story right, it put in place a number of events that quickly escalated beyond control. Now, if you look at the Weinstein Company, it had a lot of problems before the New York Times did that story. This liquidity strained, It had a serial borrower of money, and even though it had a lot of successful movies, the US successful movies were bringing it down. I'd be like talking about a mutual fund saying, well, they have ten great stocks.

And like, yeah, but they have fifty bad stocks.

So unfortunately, you don't get to just talk about the ten positive ones, except maybe in Hollywood.

So they were were they losing money?

Oh?

They were already in solvment before the situation when Harvey had erupted.

I didn't realize that, Okay.

The Weinstein Company, they're good at making movies, but definitely not great at contracts and accounting and whatnot. A number of different things were in disarray. But ultimately what got me to at a table was once the story broke, all the creditors started panicking because if Harvey was going to be removed from the company, what do you hate the man or like the man or love his movies.

And where are you physically when this happens? Where are you living?

So I'm living in Dallas, Texas, right, the last place you'd expect to find somebody to go to Hollywood and invest.

We got a.

Call from actually one of our limited partners called up and said, Hey, you know a partner of ours as a movie that's going to get caught up in this.

How do we get it out of this process? Oh?

That was your way in. Someone called and asked how you could extract a single movie from the Weinstein Company. What movie was it?

It was called War with Grandpa with Robert de Niro, So it had not been released yet, and you know, it's just the fear of the investor was, well, what happens if we get stuck into s bankruptcy and the movie doesn't get released and you know you've spent all this money making this movie, right, You've got all this money on the table. In fact, there was six movies stuck during the period that we bought.

Another.

One's called Upside, great movie, strangely about a turnaround guy. Brian Cranston plays a turnaround advisor. It's about a quadr logic. So this was a movie that wasn't yet done, but they had put considerable money into it. And even though you had Kevin Hart and Nicole Kidman a great cast, it became the cloud of uncertainty over the entire Weinstein, which is what if America boycotts this? So the creditors,

So there was a process can we do it outside of court?

I mean, does it have to be thrown into bankruptcy?

Yeah? Does it? Does it have to go into bankruptcy? Was the kind of question de jure, and.

Most people would rather do a deal outside of bankruptcy. What they don't realize is it's actually a very highly effective tool in order to help the company get back on its feet. And it's to me, it's the entire reason our bankruptcy code exists is that a company that continues to go and concern is most likely more valuable than a company that is liquidated and resolved.

Which, so what did you do with Harvey Weinstein's business?

So I took the position early on with a number of the members of the board and the advisor that there was no way to buy the company outside of bankruptcy.

And if you bought, if you bought it before bankruptcy, you'd inherit all those problems. And if anybody, anybody want to sue for anything Harvey Weinstein ever did, you'd be liable.

That. That was my position, because every single day at that time, there was another claim popping up against the company, either nonpayment or the victims, and so there it was just an absolute It's like hitting a bee's nest. It's a swarm around this company of people making claims against it.

And so to me it was a classic.

It needed to go into bankruptcy just to stop the clock for a moment, take a deep breath, assess what's there, and then reorganize the company.

What did you see in this company that was valuable?

The library?

I mean it was two hundred and ninety nine movies that America loved and actually I loved worldwide.

Right. You had the Quentin Tarantino collection.

You had movies like Kings Speech, you had The Butler, you had Silver Linings playbook, you had Project Runway television show, you had Yellowstone, and Hollywood took this position of nobody's going to watch this again because of what Harvey did everybody's going to boycott it across America. And this is this is tainted goods. What they didn't realize is people in Kansas and Houston and Dallas, they didn't even know

To maximize value.

Is it lets somebody buy it without the worrying about well what about so and so, you know, gives them a format through the bankruptcy court in order to resolve their claims and disputes, and allows the company to go and survive.

So I said, if we can just.

Get the library out of this alone, there'll be sufficient value.

Well, so tell me what happened in the bankruptcy, Like, how come there aren't dozens of people trying to buy this library? And how can you get it at a decent price.

In March of twenty eighteen, we entered a bankruptcy with the company. Said here the company's filing bankruptcy, but don't worry. We already have a white night. They're going to acquire the asset. I set up a company called Land Entertainment as the vehicle to come in and buy it. And the number that people love the quote is, well, what could you read in the bankruptcy court? So the bankruptcy court said I bought was a stocking orse for two

Did you assume any of the claims that might have been filed against Harvey. No, I'm just curious what claims did you assume?

So what we were able to do is and it is all very public.

So we went in and said, look, we're prepared to buy all the assets for X, and here are the claims that were prepared to assume. And there are certain claims that if you don't assume, you're not going to get approved.

Is a stocking horse. So a stocking horse by model is to provide a floor bid.

You're the first bid in an auction.

You can I can always bid more, but you're not supposed to bid less as a stocking horse. So you come in with a floor bid and you say here's what I'm willing to assume, here's what I'm willing to pay, and that bid gets put together as an order and then gets put out there for all the other bidders. So I came out in March as a stocking horse with the company to say, hey, it's not going to be obliterated from the earth. There's a buyer here, they're going to hire the employees and there's going to be

Right.

A number of people objected, saying, well, you're onored. He hasn't said what he's going to do with my claim. He hasn't said that he's going to assume my claim.

I don't think that he.

Has a right to buy the movie without so all those types of objections, right.

Yeah, So Meryl's in a movie and she's got a piece of the movie, and she's still not seeing her cash.

And somebody told her, hey, you know what, it's going through a bankruptcy. Somebody's buying it. If you want to get paid or you want to make a claim, now's the time. So there was a bit of a pileon and a lot of it was because the records were so bad that they didn't even know and to be honest with nobody had filed bankruptcy in this much of disarray. I mean, Weinstein had talent, they had paid in five years, but it was unclear about well did he just give him another movie?

What did he do?

Was there some other form of payment? So it was there was a lot of noise around the case that got debated in a bankruptcy court about who had a claim, what the amount their claim was, and whatnot.

You're getting an education in Hollywood, yes, And what are your takeaways as someone who's a complete outsider walking into this place? What strikes you? How's it different than you might have expected.

When people are losing money, the first thing they do is look for somebody to blame other themselves, Right, whose fault is it? Why am I not getting paid? You know who is getting paid? And so people start getting very upset about where they are in line, what claim they have learned, the difference between what they think they

I'm so and so. And it was interesting to watch Judge Walwrath.

Mary Walwrath was a presiding judge who's been on the bench in Delaware a long time, very experienced practitioner, and people would come in and they kind of had this do you know who.

My client is? She?

He was very like, I don't really care who your client is. The bankruptcy code doesn't have exceptions for you know, oscar winners.

I'm sorry.

So I think that was the most interesting thing and probably the biggest thing that we People like, what do you expect?

I said, I don't know.

I thought, this is going to buy a movie collection out of bankruptcy and do what I do.

Right, right, So what happened in the auction? Did you we able to buy it at the floor price? Or were there are other people who came in a bit.

I paid below what my opening price was, which if you'd asked me beforehand, I said, I've never seen that happen that you actually the stocking horse actually lowered the

Right, it was all or nothing.

But then what I realized is they couldn't even tell me the status of certain payments.

They couldn't tell me certain.

Claims, and it became a lot more complicated, and they anticipated there became a real question about whether or not they could deliver the assets to me under the terms that I had set out.

Sure because they claim because they claims more complicated than they kneed, right.

I had I thought a real argument that they could not deliver the assets in the status that they said. So we basically said we wanted a massive purchase price reduction, and they threatened to sue.

There was a lot of back.

And forth in the press, and you know, people here, here's Wall Street coming in with this restructuring professional that's trying to But I was just being to me a good fiduciary of my of my responsibility of my bestors, which is, hey, if you can't deliver what I said, I'm not going to pay it. So I actually we mutually agreed to a purchase price reduction and I closed.

What did you buy it for?

I was like a twenty five million dollar reduction off the top.

What's the most interesting claim you took on that you didn't expect to the you.

Know, the biggest one that hung over in that case was what about the victims claim? What happened about the women that have claims? And who's going to pay that? I mean, you remember this time he had he was allegedly he was accused. There was no judgment against him. You know, it took three years for them to work it out with the court what they got. But you know, to me, that wasn't a position of a bidder to take. What was amazing is how many people said, no, no,

I'm not the one that's going to set it them ount on. How do you.

What's proper for what allegedly happened? So we avoided it. But it was amazing how much it kind of came back to us time and time again of why aren't you assuming or paying something or doing something in that realm. And by the way, those victims had a voice in this case throughout the entire end. You know, the insurance plays into it. There's a number of things that come to bear when people are charging not just the manager, but with the company with the crime, which is again an FTX issue.

Right right, So I want to talk about FTEX now, but before just just finish the Weinstein conversation. How's the company doing now? How did it work out?

I'm happy to say after five years, six years.

You know, once we got once Lan Entertainment got outside of bankruptcy, we hired a number of people back, We cut deals with the producers and distributors. We released The Upside at the beginning of twenty nineteen. Everybody thought the movie W'd be boycott did one hundred and thirty million worldwide, did very very well. Project Runway that everybody thought would kind of go down with the stream we work with

Continue success. So we've been very happy. The company's doing well.

On background. We'll be right back. I'm back with Andy Mitchell. We just heard how it was firm dealt with one majorly distressed asset, the Weinstein Company, which is fascinating, but it actually called him to get his take on what the future might hold for a FTX, another company that's sliding down the twin tracks of bankruptcy and criminal charges against its founder.

FTX valuation is the biggest question, and I think that was the case beforehand. There's a lot of volatility in this, you know, I try to explain to my kids, what's what's crypto? What's this is a digital goal, right, We've created a digital currency that has value, and the value of that has swung wildly over time. So I think that was the first time you did the STX when it hit the wall, and where it is now is

I mean, he got he bought five billion dollars worth of venture capital assets, like companies, pieces of companies. What about valuing those?

This one is going to be tough because it's, you know, there's a lot. When it's easy to value something, you can get a lot of experts in a room, and probably if there's ten of them, more.

Than five are going to go to same direction. This one.

You could have ten different views in the room with ten experts. From zero, it's worthless to you know, it's it's in hibernation.

It's going to be worth a lot.

It's just there's an uncertainty right now to those that believe, you know, those guys made good investments, they just got caught in a bad time and a run on a bank and it wasn't their fault, which I'm assuming is Sam's preferred story, is that if you guys hadn't ran and pulled all your deposits out, we wouldn't have been in this situation. I wouldn't have had to do what I did.

Is the volatility of the assets or the difficulty of valuing the assets. Does that make this a prey special bankruptcy case or are there others like it?

I think this will make it one of the most difficult cases.

Is that the broader the range of views of value in a bankruptcy, the harder it is to get to a deal. I don't think there's anybody that could come by all these assets or would right now. Maybe the crypto you could put it in a bucket and say, well, look there's there's transparency in the exchange. We can look at it on other exchanges. But I think there's going to be such a huge range of values for whatever's left that that's going to create a problem.

He had a made five hundred million dollar investment in an AI company called Anthropic half a billion dollars. If you're running the bankruptcy or you're running the company right now, how do you maximize the return on that? Like how do you go about unloading a venture capital portfolio?

I would look to when Lehman went down right and you looked at Leman's assets, you had to start to put them in three buckets, right, assets that just sell them quick. They're melting ice cubes. They're going to go down in value. We just need to get them off our books. At the other end, you had assets that were so good and so readily available in pricing, there was a lot of demand for it. You just sold it and then they ended up with a whole lot of stuff in the middle, which is, okay, it's not

Trust or something. That was the problem to fall back to Winstein.

If you were trying to sell it under those conditions, when everybody was, you know, pitchforks and torches, let's go burn everything that says the wine stain on it, it was pretty hard to sell.

Everybody was scared of it.

You get six months away and people are like, Eh, everybody's watching padding the bear. It doesn't really matter. So it's the same kind of thing as there's a bit of a stigma. If I'm the professional sitting there looking at this saying Okay, I'd rather have the benefit of time. Let me get it away from the situation so that it doesn't get caught up in the contamination or the value drag of Well, anything that Alameda or Sam touched is now toxic, and so I think it has to go through.

If the longer runway they can get, the better.

So you want to draw this out again.

It depends on the asset, It's all I told people like it don't.

I mean, there's certain assets that you know, if you're not investing in, if you're not taking care of it, if key people are leaving, if IP is walking out the door, like it's one of the reasons I support the fact they file bankruptcy quickly. But when you're coming about disposal of assets, the it's it's valuation one on one right, which is you want to sell when when the seller is not there's no compulsion to sell and the buyer has.

No compulsion to buy.

That's the honest price, right, And so if you sell under dress or at a time of uncertainty, it's hard to get the best price.

So if you really believe you have a winner, you want to create an environment where it gives you time.

And and creditors think that way too, which is, you know, they have different views of value and they're like, well, I don't want you to sell it right now, Let's let's get through this and let's get that company stable and away from FTX or away from Almeda in that case, right, and let's let's get some independent management there and really see what's worth.

Some of the parts here has to be greater than the whole. Right.

So this is not like Weinstein where you can go, hey, just buy FTX, right, I mean it was, it's like, or just buy Almeda, right, just coming and buy.

You'd be like buying someone's at the contents of someone's attic or basement. It's such a disparate collection of things.

And you know, you don't want to go with the you know, storage unit approach, like hey, just buy whatever's in here.

You know, some's good, some bad. But I mean this one, I got to.

Believe that, not knowing much about al Amidia, but if they made twenty investments, they should go out with basically a twenty part information memoran that says, here's what they bought, here's what it is. You have an opportunity to take their place in this position? What you go for, right, and you'd look at those, You look at those and you know that's the issue that comes up with creditors

And there's other.

Credits who know they're going to have an ongoing relationship with this company or some facts sate of the company.

Right, they're owed money, but at.

The same time, maybe they have an exchange or they have an interest in exchange and they're causied strategic in their interest.

What do you think will happen to FTX in the end? How you think this is going to play out over many, many, many years or do you think that it could be simpler than that.

I think you've got two pieces here, right, You've got the FTX, which was the exchange. Me personally, I have to believe that business is dead. The people that run exchanges, based on the reputation of the exchange is that it's an honest place in order for you to exchange goods. It's very transparent and everybody's playing by the same rules, and that's dead forever the name FTX.

You might as well restart Lehman Brothers.

It's been so tarnished and it's such a lack of confidence in what they did and what's happened, at least what people know. You know, if I'm running this thing, that's the first thing I'm going to do, which is, well, is there some architecture or structure that somebody did to create the legitimate exchange that if you were to change the.

Name has real value.

So could FTX live on in another form? Yes, because people need to trade. I keep track anymore of the number of digital currencies out there, so they need notes exchange. Then you look at Alameda and look, it's just a fund. So the fund's gone. But you know the investments they made, to your point, may they have real value? And I'm sure that's going to be his defense is, look, these were valuable companies, and you can't say I committed a crime because at that certain point in time the value

So I do think a lot of those investments.

They made are probably still going to make it out now if they should never should have made them, they're probably problematic to begin with. I mean, it's I think what a lot of people seem to be saying is that he didn't really know what he was doing, so he was out investing in every scheme that crypto had available, and so you're gonna have a lot it's just absolute junk in here.

If you imagined us ten years in the future, who what kind of person is going to make a killing off the FTX bankruptcy?

And as I see her today, I don't think it's going to be a good story because it's.

Not like, you know, there's let's say, get lucky.

I don't see it being a phoenix coming from the ashes, right.

I mean, it's going to be a very long slog to regain trust.

Technically, you're going to earn the comeback of this, right, So it's gonna be somebody who buys it and takes a long time to say, Okay, how do we earn back trust? How do we create real value in this exchange? And it's just going to take time to do. I don't think there's any quick hero story here that is going to emerge.

And that's why I'd have no idea who wants to buy it?

Because it's this, This is gonna be real work, and you're almost better off just starting in new exchange.

What about a quick hero story in the purchase of the five billion dollar venture portfolio?

If you look at the five billion in investments, again, I have to go investment by investment what is it that they invested in? Because there's a lot of useful things in blockchain and coins that are created that are creating real value. And if you were to come in when nobody wanted to touch it and buy it and stabilize it and carry it.

Through, I'll meet it. I'll meet it.

Right, Yeah, probably a lot to work with, right, there's probably, But again, your your first objective is to buy it and get it as far away from FTX as possible. Right, It's almost like you don't want to admit where you found it. Would you buy that through my banker?

Right now?

Because as soon as you say I bought it from FTX, like, oh you sure, it's not. It's just human tendency, right, It's just just the scarlet a if you will.

Yep, all right, So my producer has dug up this quote. I think it's pretty funny that you said people have called you an opportunistic capitalist, tombstone steeler and raider, but you consider what you do to be effective altruism. Why.

Look, I really believe that you know, the world moves in cycles. You go up, you go down, right, You have good days and bad days. You live in a binary world.

And so.

Going out and saying I want to find weak and underperforming assets and buy them and bring them back to where they should be to me is a very noble pursuit. But yep, human tendency is when somebody succeeds to say, well, they must have cheated, they must have done something. And the more you succeed, the more you must have somehow done something that was right. There are people that are like, shame on you for making money on the Weinstein company.

You came across and took advantage of the situation. You know, shame on you. Right.

It's I always said if I wrote a book about my life, the opening line would be no good deed goes unpunished, Right, Because I look at it as I bought an asset that thousands of people worked on to make movies and television shows, and then I took it from a position of almost going into the abyss and put it back into you know, people are enjoying it, and you know, the credits did well. And I paid

I really appreciate you doing this for us.

No, No, it's good. It'll bit of fun and I'm excited.

Yeah, it's totally fun.

I'm excited for this book.

It's it's a really fun book to write.

All right, see you later, all right, see you later.

Andy Mitchell is managing director of Lantern Asset Management, a private equity firm focused on business turnarounds and restructurings. On Background is hosted by me Michael Lewis and produced by Catherine Gerardeau and Lydia Jane Kopp. Our editor is Julia Barton, Our engineer is Sarah Bruguier. Jake Flanagan helps us with licensing. Our show is recorded by Koepher Ruth at Berkeley Advanced Media Studios. Our music was composed by Matthias Bossi and