P'tex fallout sees firms scrambling

BCST Staff, July 28, 2003

Kannapalis, NC — As the clock wound down late last week on Pillowtex's fourth and possibly final extension to come into compliance with defaulted loan covenants, the mill's customers, licensees and competitors were bracing for the impact of a potential sell off or liquidation.

As of last Friday, there had been no layoffs in the product development, design or sales departments, only "temporary layoffs" associated with idled manufacturing facilities, company spokeswoman Karen Cobb told HTT. All six pillow and pad plants were in operation last week. But Friday afternoon the company told employees there will be no manufacturing operations this week, although distribution centers for pillows and pads, bed and bath will remain open.

"We are concentrating on fulfilling customer orders from our existing inventory of finished goods," a pre-recorded message said. Cobb would not disclose how much inventory Pillowtex had remaining.

However, Pillowtex was not shipping its full product assortment. And across the industry, companies were preparing for the possibility of life without the nation's third largest home textiles manufacturer.

"It's not business as usual, and it hasn't been for a couple of weeks, depending on the product category," said Kohl's executive vp, home, Jack Moore. "In cases where they already had the raw goods, they did a very good job of shipping the goods on time."

In cases where Pillowtex had to obtain raw materials from its vendors, finished product was much more difficult to obtain, he said. Nonetheless, Moore noted how Pillowtex has conducted itself throughout the agonizing process of seeking a white knight.

Candid & forthright
"They have been a very, very good supplier of ours, even during a very difficult last couple of years. They have worked with us very hard during very trying circumstances to be candid and forthright about their situation. And it enabled us to have in place back-up plans for the product they were supplying us," he said. "We have a very strong preference that they survive."

At JCPenney — where Pillowtex is the supplier of the 42-color JCPenney Towel — Springs Industries is the "leading candidate" to replace Pillowtex in the production of the towel should no buyer emerge for Pillowtex, according to Charles Chinni, executive vp, gmm, home and jewelry, JCPenney.

Penney has 120 days of inventory warehoused at Pillowtex, Chinni told HTT.

"We are being very strict on color and quality with Springs," he added.

The four "seasonal" or new fashion colors would be produced in Brazil through Springs' alliance with Coteminas, the balance produced domestically, he added. Penney merchandises its core towel in 22 colors in retail stores and sells 20 additional colors through its catalog and Internet site, although retail store customers can order the other colors through their local store. The 27" x 52" towels regularly retail for $7.99, and sale at $4.99.

Linens 'n Things is working on "alternative sourcing opportunities to compensate for any potential disruptions in the flow of product," cfo William Giles said during the retailer's second quarter analyst's call last week. He noted that industry consolidation "may result in the disruption of selected programs over the next few months."

Pillowtex licensee Ex-Cell Home Fashions, which produces coordinate bath collections under the Fieldcrest brand, also is preparing itself.

"We are looking at strategic alternatives to protect that business because it's a very good business for us," said Barry Leonard, president.

After missing its latest loan payment, originally due July 1, Pillowtex has been limping ahead on a series of week-to-week extensions from the lenders. Late last week, its lenders continued to negotiate the ultimate fate of the company and the jobs of its 7,800 workers.

After Pillowtex, its sales in a free fall, missed the latest payment on the $108 million balance of a five-year, $150 million loan, creditors gave the major mill a week to find a buyer or come up with the cash before they seized its assets and put them up for sale at auction, keeping the proceeds for themselves.

As Pillowtex kept scrambling to find a white knight, and at the request of North Carolina Governor Mike Easley, the banks have kept doling out one-week reprieves, four to date, sending out a signal that negotiations may be proceeding to sell off the company, in pieces if not as a whole.

Brands in jeopardy
Each one-week reprieve holds out the hope that the company can escape seizure and an auction, as creditors give the once-proud company time to wind up a deal for the sale of its most valuable assets — its brands.

But as each new week passes, the value of those brands continues to erode under the weight of retailer skepticism. Whether through a negotiated sale or in a liquidation auction, a short-list of prospective suitors — for the Pillowtex brands if not its plants — would include larger, financially stronger rival Springs Industries, which has twice over the past 15 years tried to buy Pillowtex, each time to be outbid.

Indeed, as recently as 90 days ago, in early May, Springs had put together a deal to buy out the entire Pillowtex operation, only to bow out after a textiles union loudly denounced the deal, fearful the sale would trigger the shutdown of Pillowtex's giant Kannapolis, NC, manufacturing complex and the loss of more than 4,500 North Carolina jobs.

A dark horse candidate might be another rival, WestPoint Stevens, deeply in debt itself and now in Chapter 11. While the company clearly cannot afford to buy anything on its own, any of the three major bondholders that now control the company — ESL Investments of Greenwich, CT; Greenwich Street Capital Partners, New York; and Perry Capital Management, also of New York — together or singly could buy some Pillowtex assets, likely the brands, and later merge them into WestPoint once it emerges from bankruptcy.

ESL, the largest of WestPoint's bondholders, and the investment vehicle of financier Edward Lampert, is clearly in the driver's seat as WestPoint remakes itself. He is also the largest of Kmart's new owners, also serving as the retailer's chairman. ESL also owns a 10 percent stake of another retail giant, Sears, Roebuck and Co.

WestPoint's interim ceo, Chip Fontenot, confirmed in a recent interview that before going into bankruptcy, his company tried to buy Pillowtex, and may still be in the running to acquire the Pillowtex brands. "We put in a bid for Pillowtex," Fontenot told HTT. "We could have combined the two companies. Even with our balance sheet, we could have supported it. But Springs came in with a higher offer — and then they withdrew."

Usual suspects
Now in bankruptcy, said Fontenot, "We can't do it, but that's not to say the new owners couldn't."

Beyond those two home fashions heavyweights, speculation has swirled about other prospective bidders, including U.K. textiles broker Broome & Wellington, parent of American-based Homestead, which earlier bought the former home fashions business of Guilford Industries. Among the other frequently mentioned "usual suspects" are carpet producers Mohawk Industries and Shaw Industries, both with deep pockets and more than a sidelong interest in the home fashions business.

Mohawk has already developed a strong presence as the industry's fourth-largest player with more than $600 million in home fashions sales. Shaw has yet to keep pace with rival Mohawk and has yet to make a major foray into the home fashions business, despite its apparent interest and cash resources. Its parent is investment company Berkshire Hathaway, controlled by Warren Buffett.

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