WL Ross & Co. came out on the victorious end of the protracted battle for Burlington Industries, winning the bankruptcy-court sponsored auction for the tattered textiles manufacturer with a $620.1 million offer. The deal, which still needs bankruptcy court approval and is subject to review under the Hart-Scott-Rodino Act, is expected to close sometime between September and October.
“We have every confidence Burlington can be revitalized,” WL Ross & Co. CEO and chairman Wilbur Ross said following the deal’s announcement.
Burlington initially filed for bankruptcy protection at the end of 2001, and in the filing revealed it had approximately $1.1 billion of debt. The company has operations in the U.S., Mexico, India and Hong Kong. It manufactures soft-goods for apparel and interior furnishings. The company has struggled in step with the economy and has suffered from heavy competition from cheaper imports.
However, Ross remains convinced Burlington can regain its name among the top players in textiles. “Burlington is still a very powerful name, and throughout its bankruptcy the company has been generating positive cash flow…This is not a Pillowtex,” Ross said, referring to the North Carolina textile manufacturer that last month declared bankruptcy for the second time in as many years.
WL Ross will pay $614 million in equity, and after the deal goes through, the company may arrange for a separate line of credit. Additionally, as part of the sale price, the firm will pay $6.08 million, a credit negotiated in July for the enhancement of the breakup fee. Concurrent to the sale of Burlington, the company agreed to divest its Lees carpet unit to Mohawk Industries for roughly $355 million, a sale Ross said is “in effect the financing” for the Burlington purchase.
Once the deal is complete, Burlington estimates that the new purchase price will increase the return to unsecured creditors to approximately 41.5% per allowed claim amount. WL Ross itself already has a substantial stake in Burlington debt, and currently owns approximately $82 million in unsecured Burlington bonds and $7 million in bank debt.
Ross vs. Buffett
Prior to WL Ross’ winning bid, Berkshire Hathaway submitted a proposal of its own for Burlington-a $579 billion bid that had been accepted by Burlington management. That submission trumped WL Ross’ first offer, but following a plea from Ross to Burlington’s board of directors and the bankruptcy court to reconsider the Berskshire Hathaway proposal, the court went against the deal, citing an exorbitant break-up fee included in the transaction. Under Berkshire Hathaway’s proposal, the unsecured creditors would have received cash and certain other assets estimated at roughly 35% of their claims.
At the time of the ruling, Ross told Buyouts, “We’re very happy with the decisions the court made. We don’t have an axe to grind with Mr. [Warren] Buffett, but we didn’t like the bid in any way…The court’s decision gave our committee [of unsecured creditors] a stronger voice.”
Still, despite the revised deal, not everybody is leaving with a smile on their faces. Burlington stockholders will not receive anything from the company when it emerges from bankruptcy protection, and the company’s largest stockholder, Walter Rucker, who now holds a grudge and roughly four million shares of Burlington stock, has pledged to seek compensation via a settlement.
From Man of Steel To Satin King?
While Ross noted there are a number of similarities between the firm’s International Steel Group platform and Burlington, he hesitated to say the same blueprint could be used for the textile manufacturer.
“In some ways they are similar, but Burlington is different in a number of other ways,” Ross said. “Both companies were in bankruptcy, both steel and textiles are very basic industries faced with heavy import competition and both companies had performed a lot of downsizing.” However, “Burlington is a non-union company and Burlington’s businesses are all operational and profitable at a divisional level [unlike ISG].”
Ross expects the company’s turnaround to be helped by the weakness of its competitors. He also sees the government taking a more active role against foreign competition. “I think the industry is getting weeded out at a pretty rapid clip, and a lot of people in Congress are starting to realize that there’s a pretty strong correlation between the trade deficit and job losses and the weakness in the manufacturing sectors,” he said.
Ross is also anticipating the sector will be ripe for consolidation and expects Burlington to be active in its assessments for any opportunities that arise. Additionally, he noted the company is ahead of the curve in its adoption of new technologies. Burlington already employs nanotechnology to make its nano-care and nano-pel fabrics, known for their stain-blocking and wrinkle-resistant characteristics.
The Burlington deal will be primarily financed with equity from WL Ross’ WLR Recovery Fund, although other WL Ross funds will join in the financing with co-investments.
Separately, WL Ross formally announced its intention to float ISG in a $250 million IPO on the New York Stock Exchange. The offering will represent the first IPO from the steel sector in nearly six years. Following WL Ross’ acquisition of LTV Corp. out of bankruptcy last year, the firm has built ISG through the additional acquisitions of Acme Steel and Bethlehem Steel to create the second-largest integrated steel producer in North America, with the capacity to cast more than 18 million tons annually. Goldman Sachs and UBS Warburg have been tapped to underwrite the offering, and the company will trade under the ticker symbol “ISG.”