Li & Fung Acquires Homestead

Brent Felgner, November 27, 2006

Li & Fung USA's newly acquired Homestead fashion bedding division will debut Royal Velvet and Cannon bedding lines during this February's market week, according to David Greenstein, who now heads the division. Most of the division's assets were bought out of bankruptcy last week.

"You know Homestead, we look at things differently. And this is right at the sweet spot of our expertise," Greenstein said in a telephone interview from the company's Seattle office, which is slated to be closed. "We really think that the decorative part of bed is what leads brands."

Royal Velvet and Cannon will join Homestead's "microbrands," which along with its private label and hospitality businesses form the core of Homestead's top line. Homestead is on track to generate volume of about $50 million this fiscal year, Greenstein said.

Greenstein has lusted after the former Pillowtex brands for years and was part of a group that unsuccessfully bid for Royal Velvet, Cannon, Fieldcrest, and Charisma in Pillowtex's own Section 363 bankruptcy action in 2003. The winning bid of $120 million, more than double that original stalking horse bid, went to GGST, LLC, a consortium of private equity interests that then became Official Pillowtex LLC. Royal Velvet and Cannon were then licensed to Li & Fung.

The irony that he will now manage those brands has not been lost on Greenstein.

"I think it's good. It's an interesting confluence of abilities," he said of the acquisition. "They've got certain skill sets and we have certain skill sets and I think [the combination] could be amazing. And the market certainly needs some new leadership."

Li & Fung made an initial payment of $8.9 million — 70% of the total price, which is north of $12 million — during the Homestead sale closing, which came after a scheduled Section 363 auction was ratified by a federal bankruptcy judge here.

The auction itself never actually occurred, Greenstein said, but represented the result of negotiations "on the steps of the court" between stalking horse Li & Fung and Homestead's largest secured creditor, DDJ Capital Management, which had threatened to compete in the auction by credit bidding. Most of the payments in the transactions will be made directly to DDJ, according to court documents, with other creditors — including the unsecureds — variously accounted for in the purchase agreement.

"Maybe I expected a little more interest in Homestead from third parties," Greenstein opined. "But I think people realized that this model needs a lot of working capital. So I was surprised there weren't more active bidders."

"In this industry, everyone is a seller" and there are very few buyers, he added.

The resulting purchase price of about $12 million, based largely on inventories, goodwill, trademarks and license agreements, represents a premium ranging from 54% to about 65% of the original stalking horse bid of about $7.8 million. Greenstein said inventory valuations rose from 43% to 65% and goodwill increased from about $250,000 to $1.64 million in the final sale agreement.

The precise purchase price appears slightly elastic since it must be finally determined through an accounting process.

Greenstein said the higher purchase price will have no impact on Li & Fung's working capital requirements for Homestead.

A 363 auction, which has become popular in corporate bankruptcies, occurs independently of a normal Chapter 11 reorganization plan, which may or may not proceed afterward. It permits the judge in the case to "cram down" aspects of a reorganization of the estate but becomes a de facto liquidation of the predecessor company, and permits the surviving entity to emerge free and clear of its prior obligations.

"I think it was an amicable and good solution for everyone," Greenstein summed up.

Homestead was the last piece of the London Fog Group to be sold off following that company's Chapter 11 filing last March.

Li & Fung USA president Rick Darling issued an e-mailed statement referring to Greenstein and his team as industry "thought leaders" and hailing the acquisition as another step in his company's evolution in U.S. home textiles.

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