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Tuesday, Apr 23, 2024

Bidders Begin Assessing the Value of Metabolife


Three owners of Metabolife International Inc., the San Diego company that made a now-banned, ephedra-based weight-loss pill, recently filed motions in U.S. Bankruptcy Court to ensure the company’s sale fetches the highest price.

Metabolife filed for Chapter 11 bankruptcy protection late last month in tandem with the announced sale of the firm to a New York-based maker of nutritional supplements that isn’t accepting any liability connected to more than 350 outstanding lawsuits filed against Metabolife in recent years.

According to court records, since November 2003, Metabolife has explored a variety of options and negotiated with potential purchasers. It signed a letter of intent in November, and in June signed an asset purchase agreement with New York-based Ideasphere for $23.5 million.

Despite the agreement, as a result of its bankruptcy filing, the company is required to hold an auction to ensure that price is the highest the company could receive. The auction is scheduled for Sept. 19 in U.S. Bankruptcy Court in San Diego.

The auction requires potential bidders to show evidence of possessing funding of at least $25.5 million. The next minimum bid above the current one must be $2 million above what Ideasphere made, according to the court-approved process. Subsequent bids must be in increments of $1,250,000.

David Osias, Metabolife’s bankruptcy attorney, said the company has contracted with the Carl Marks Advisory Group in New York to contact prospective bidders, which may bring in a higher price than the bid by Ideasphere.

“So far, they’ve contacted over 80 prospective bidders and have obtained 11 signed confidentiality agreements (a perquisite for reviewing Metabolife’s bid package), and one party that wasn’t interested,” Osias said.

Metabolife’s three shareholders, Michael Ellis, Michael Blevins and William Bradley, filed a motion July 15 with the court asking it to appoint a shareholders committee to represent their interests.

Seeking The Highest Bid

Victor Villaplana, the partners’ attorney, said the filing seeks to make sure the company’s assets are sold to the highest bidder.

“We’re interested in maximizing the recovery on the sale so we have the maximum amount of money to pay the claims, and so whatever is left over comes back to us,” he said.

In the filing, Metabolife is said to have total assets of at least $70 million, including rights to insurance claims of about $40 million, and cash and securities of about $10 million.

In its initial bankruptcy filing, Metabolife listed total liabilities of $12 million, but Villaplana, an attorney with Seltzer Caplan McMahon Vitek in San Diego, said the company’s actual liabilities aren’t known because of the outstanding lawsuits.

Ellis and Blevins founded Metabolife in 1995. The business was based upon a weight-loss pill called Metabolife 356 that included an alkaloid called ephedra as one of its ingredients.

While the product was effective in helping many people lose weight, ephedra was proved to be a lethal ingredient to some consumers with existing heart problems. The product was blamed in the deaths of hundreds of users of the pills, and the company is a defendant in more than 500 lawsuits.

High-Flying Sales

Before Metabolife stopped making its primary weight-loss pill in late 2003, annual sales soared into the hundreds of millions of dollars. By 1999, annual revenues reached $350 million, and during a five-year period ending in 2003, Metabolife generated more than $1 billion in total sales, according to court documents.

In July 2002, Internal Revenue Service agents raided the corporate headquarters of Metabolife, as well as the homes of the firm’s three owners, on suspicion of the parties’ not paying federal income taxes.

In the company’s bankruptcy filings, a list of the largest unsecured creditors includes the San Diego office of the IRS with a claim of $339,000 for unpaid federal income taxes in 1997-98. Inclusive of penalties and interest on the debt, the IRS said it is owed $979,000.

According to Metabolife’s owners’ recent filing, during the past five years the company settled 182 ephedra-related lawsuits for more than $11 million for an average of $62,000 per settlement.

Payouts In Millions

Villaplana said based on that average, remaining liability to the company would be about $22 million.

Through June 30, Metabolife and its insurers have paid about $40 million in legal costs for ephedra litigation, of which $20 million was paid by the company, according to the same court document.

During 2005, Metabolife paid out $4.1 million in legal settlements and obtained reimbursements from its insurer of $1.9 million, the court filing stated.

Metabolife no longer makes any products containing ephedra but still generates sales through six different nutritional supplements sold in major retail chains, including Wal-Mart, Kmart, Costco and Rite-Aid, as well as through its Web site.

Last year, sales were $46.6 million, down from $83.4 million in 2003. The company said in an early filing that it took an operating loss last year of $11 million.

Metabolife has also drastically reduced its employment from nearly 100 people last year to 16 employees in San Diego. The company still maintains an office on Copley Drive in Kearny Mesa. It also has a manufacturing facility in Orem, Utah, with 32 employees. There also are five employees in Memphis, Tenn.

In a ruling July 15 in U.S. Bankruptcy Court in San Diego, Judge John Hargrove approved the auction process and an employee retention program, except for a retention plan affecting Metabolife’s top six executives. According to previous agreements, the six stand to receive a total of $1 million in bonuses upon the completion of the sale, in addition to severances.


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