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Bid for Performance Sports will be tough to top and may not leave much for shareholders

An employee sorts Bauer hockey sticks displayed for sale at an equipment store in Mississauga on Oct. 31, 2016. Performance Sports Group Ltd., the owner of the Bauer and Easton brands, filed for bankruptcy protection as part of a deal to sell the hockey- and baseball-equipment business for at least $575 million.

Cole Burston/Bloomberg

A $575-million (U.S.) bid unveiled Monday for the assets of Performance Sports Group Ltd. could prove difficult for any other bidders to top and may leave little or no money available for the company's shareholders.

PSG, a sports-gear maker that owns valuable brands such as Bauer and Easton, filed for bankruptcy protection Monday, citing a high level of debt and declining sales. Sagard Capital Partners LP, PSG's largest shareholder, and Fairfax Financial Holdings Ltd. submitted a $575-million joint offer, which is known as a stalking-horse bid, and now PSG's advisers will initiate a search for other bidders.

But legal analyst Joshua Friedman of corporate debt research firm Debtwire said on Tuesday it will be difficult to attract a better offer because of how the Sagard bid is structured, which could leave shareholders with no recovery once all of the company's liabilities are paid off.

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"It seems to me that [investors] are just going to get hosed," he said in an interview. "I don't know how they overcome the combination of Sagard's and Fairfax's ability to use" the different components of their bid "to really take over the process."

In addition to the $575-million in cash, Sagard and Fairfax have proposed to extend PSG a short-term emergency loan, known as debtor-in-possession (DIP) financing. The DIP must be approved by the courts.

PSG said Monday it will use the DIP loan from the Sagard group to refinance its original term loan of $331-million and pay off the creditors. Then, it plans to use the proceeds of the sale to pay off the Sagard group's term loan DIP, which carries 8-per-cent interest.

PSG chief financial officer Mark Vendetti said in an affidavit filed in court that the Sagard group's DIP lending offer was "the best interim financing available under the circumstances" after the company also negotiated with its existing lenders.

The Sagard and Fairfax bid would be enough to fully repay the $489-million in secured debt the company had prior to its bankruptcy filings, and should cover part of its remaining unsecured debt, PSG said in court filings. But it is unclear yet whether enough money can be raised to leave anything left for common shareholders, who rank behind debt holders.

Shares of PSG were delisted from the New York Stock Exchange after the company filed for bankruptcy protection Monday, but began trading Tuesday on the U.S. "pink sheets" market, a lightly regulated over-the-counter market for companies that do not have a stock-exchange listing. The shares fell 52 per cent to $1.67 Tuesday, which suggests investors think there will be some money available for common shareholders after debt holders are fully repaid.

Anyone still holding the stock is "banking on a higher bid," Mr. Friedman said.

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PSG has said it will search diligently for a better offer. The company said it has compiled a list of 90 prospective bidders and would begin contacting them Tuesday to solicit as many offers as possible. The company has set a deadline of Jan. 4 to receive offers and will hold an auction Jan. 9, if necessary, to determine the final buyer.

Analyst Rommel Dionisio of Memphis-based Wunderlich Securities Inc. said he believes the auction could attract other international sporting goods companies as potential buyers because of PSG's leading position in hockey, baseball and lacrosse markets.

In a research note Monday, Mr. Dionisio estimated shareholders could recover money on their investments. Under bidding procedures filed in court by PSG, anyone wanting to make an offer for the company must top the bid from Sagard and Fairfax by at least $7.5-million.

Editor's note: An earlier version of this story said that the bid by Sagard Capital Partners LP and Fairfax Financial Holdings Ltd. could be worth as much as $936-million (U.S.), including $575-million offered in cash and an additional amount worth as much as $361-million in debtor-in-possession (DIP) financing. In fact, the Sagard group's offer is worth $575-million, as the amount of the DIP loan cannot be applied above that level to sweeten the purchase price.

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