Image: Jim Cooke

Gawker Media has filed for bankruptcy. The specific circumstances leading to that bankruptcy are unique and bizarre. The fact of a media company declaring itself bankrupt, however, is pretty much a commonplace. Under other conditions—even facing down a different, more conventionally motivated lawsuit—Gawker’s bankruptcy process might seem somewhat straightforward.

Obviously the lawsuits facing Gawker are not conventionally motivated ones, as became clear once it was revealed that billionaire investor Peter Thiel, apparently motivated by a decade-long vendetta, is the secret funder of Hulk Hogan’s litigation against the company. The lawyers funded by Thiel look like they will harry Gawker throughout the process—and they have tools with which to do so. But there are constants to this process, things that Gawker can expect as a baseline. We should talk about them.

To be clear: This isn’t as simple as an ordinary sale of a company. When Gawker Media CEO Nick Denton chose a bank to handle this, he chose the right one for the job. Houlihan Lokey isn’t best known for run-of-the-mill assignments. They’re most noted for being specialists in complicated situations, often involving financially distressed companies. To prove just how good they are at it, here is a picture they made of a banker hugging a puppy on a sinking boat surrounded by sharks.

The situation Thiel spent a vengeful decade pushing Gawker into is... somewhat like that picture? The boat (Gawker) had limited time owing to the rising water (the extraordinary cost of Hulk Hogan’s jury award), which was also infested by sharks (creditors who could look to seize the company). So now we have the banker (Mark Patricof) hugging the puppy (also Gawker?), who will, let’s say, find another boat (a buyer).

If this sale were to take place in an auction outside of the bankruptcy process, then it would ideally look something like this: Gawker would hire a banker and put together documentation on the company; it would make contact with potentially interested parties; some of those parties would bid to buy the company; there would be in-depth meetings with the bidders and more data made available to them; there would be more bids; and the company would select a winner.

I’m a mergers and acquisitions reporter in the equities division, which means I cover this normal kind of auction a lot. Thing is, reporters like me don’t actually know anything except how to operate a telephone. So, since this is a bankruptcy “explainer,” I spoke to an “expert.” Alan Friedman is a partner at Lobel Weiland Golden Friedman and was on the team that handled the recent chapter 11 bankruptcy and auction of Freedom Communications, owner of the Orange County Register.

Friedman explained that a bankruptcy auction starts out somewhat like a normal one. The company runs a process to look for a buyer. We know that Gawker did this because someone agreed to buy it. Or, more precisely, someone agreed to buy its assets, which will be sold clear of the company’s liabilities.

Per the chapter 11 filings, Ziff Davis, the owner of IGN and AskMen.com, made an offer of $90m plus the assumption of some liabilities for those assets. It was one of two offers to emerge from a group of six potential bidders approached by Houlihan.

But because Gawker is going into bankruptcy, that’s not the end. The company still has to go through a court-supervised auction. As such, the Ziff Davis bid is what’s known as a “stalking horse” bid.

“It’s usually advantageous to enter chapter 11 with a stalking horse bidder, because it sets a floor” for the process, Friedman said. That is, the stalking horse bidder sets the price everyone else will work off in the final auction, which will be supervised and then approved by the bankruptcy court. In the case of Freedom, a stalking horse bid was expected to emerge before the chapter 11 filing, as happened with Gawker, though it turned out that the expected bid, from Digital First Media, only came through after the bankruptcy process got underway.

Bid in hand, Gawker now needs to make it through to the court-supervised auction of its assets, held under section 363 of the bankruptcy code. There are a couple of points to go through on how that auction works, so let’s do this in the question-and-answer format of solvent media operations:

What happens between now and the auction?

Gawker has submitted proposed bidding procedures that will govern the auction. The bankruptcy court will need to approve those. Then, all going well, interested bidders will submit documentation to qualify for the auction on July 25. On July 27, they’ll submit their bids. On July 29, everyone meets at the offices of Ropes & Gray for the auction.

They have to spend all day in midtown hashing this thing out?

I spoke to a reporter who covers these things and honestly it really does sound pretty tedious.

What actually happens?

Bids are made; they’re evaluated, which can take a few hours at a time; eventually someone wins. I asked Friedman about how it went for Freedom Communications. “That one started at 8 or 9 in the morning, and went through until 11 at night,” he said. I asked him if he got bored. He said the process was okay, because they had a lot of sandwiches catered.

So whoever puts down the most money wins?

The rubric bids are judged by is highest and best offer. It’s not just the raw dollar amount. For example, the assumption of liabilities like pension funds can make a lower dollar bid more valuable. In this case, Gawker Media executives have indicated that the board will also take issues like company fit and job preservation into account when determining best and highest.

Who will win?

I don’t know.

One more question:

Is Hogan out of the picture now?

No. Reporters covering the bankruptcy court case have chronicled the initial skirmishes between the Hogan team and the Gawker team. From here on out, there will be more opportunities for the former to try to make life difficult for the latter.

One of the big ones will be the hearing about whether Denton will continue to be protected from his personal liability in the Florida court judgment in favor of Hogan. The other, as Maria Chutchian points out, could be the formation of a committee of unsecured creditors.

Gawker owes millions to its unsecured creditors—that is, creditors who don’t have any collateral on the debt. In a bankruptcy, unsecured creditors are last in line to get paid, so it makes sense for them to band together to represent their interests versus other stakeholders who just want to get their money and get out. To do that, they can form a creditors’ committee.

Hogan isn’t just Gawker’s largest unsecured creditor, he’s the largest one by a huge margin. If he wants to be on the committee he can probably do it. And when it comes to how that committee will act in advising on the process, the largest creditor will, as Friedman put it, “carry a big stick.” Furthermore, this committee picks its own legal advisors, and those advisors are paid for by the debtor’s estate. So there’s that.

Notwithstanding what Hogan’s lawyers might do, come August 3 Gawker is looking to present its auction outcome to the court. The judge will have to approve the decision, and this offers a last opportunity for other, disgruntled bidders to object. For Freedom Communications, this stage was fraught: Digital First Media, the stalking horse bidder, lost the auction and disagreed with the chosen winner, claiming that there was too much risk the government would block the deal on antitrust grounds.

Such disputes come up in the final stretch a lot, Friedman said, though the actual number of them that sway the judge are few. As it happened, Digital First was right on the merits: The Department of Justice made a move to block the deal. The nixed buyer was Tribune Publishing, the spun-out newspaper arm of the old Tribune Company, which went bankrupt and filed for chapter 11 itself back in 2008. With $13 billion of debt, it was the largest media bankruptcy ever seen. Now, Tribune Publishing has been commandeered by Michael Ferro and is morphing into… tronc… as it battles an attempted takeover by Gannett. The other half of the old Tribune Company, now known as Tribune Media, has hired bankers to figure out how to hive off its assets and slim down the company.

That’s uninspiring, sure. But Companies enter chapter 11 all the time; even among the companies interested in Gawker, you find flirtations with bankruptcy. The same year that Tribune filed for bankruptcy, one of Gawker’s potential new owners stumbled. On March 5, 2008, Ziff Davis filed for chapter 11. It emerged from bankruptcy July of 2009, and ultimately announced its sale to current owner j2 Global for $167 million in November of 2012.

Jonathan Guilford is a reporter covering telecom and media for Dealreporter in New York.