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WPS Battle Still On

New York —Last week's auction and subsequent bankruptcy court hearing moved toward resolving core issues in the life of WestPoint Stevens even as they begged the biggest question of all: What will the successor company look like and how will it function?

Clearly, WestPoint's management has its strategies in mind and they are likely to move forward to a large extent. But the new business plan doesn't necessarily account for every business move its new investor has in mind.

U.S. District Judge Robert Drain at midday Friday was still considering complex arguments concerning the prioritization of the debt and the various rights of the secured creditor classes. While the outcome of his decision wasn't clear at press time, it was evident the hearing would drag on through the day, and possibly carry over into this week.

Icahn won the June 23 auction for WestPoint Stevens with a final bid of $703.5 million. He beat the last Ross bid of $697.5 million, which was not accepted by the bankrupt mill.

But the Ross-aligned Steering Committee of first lien holders arrived at the bankruptcy court the following morning ready to fight. Prior to the hearing, Ross said only: “We are in court this morning litigating the decision.”

Key components of the final Icahn bid incorporated, among other things, $312 million in a new capital infusion into the post-bankruptcy company (including a direct cash payment of $187 million), a $125 million rights offering; and a 35 percent issuance of new stock to first lien holders.

Icahn's $187 million in cash would give him more than 50 percent control of the new company.

The cash payment also gives the company an implied equity value of just over $1 billion. But when that figure is adjusted for a control premium, the net equity value of the new company comes down to $849.4 million.

The Steering Committee's core argument in court Friday morning centered on the percentage of that control premium, which was calculated by Rothschild, the financial advisor to WestPoint.

Rothschild's managing director, Neil Augustine, explained in court how his group arrived at the percentages, which he admitted fluctuated during the 48 hours leading up to the auction.

Bruce Bennett, the Steering Committee's attorney, requested a continuance to allow more time for discovery of the circumstances surrounding those changes, a request that was denied by bankruptcy court Judge Robert Drain.

Bennett told the court that the last bids were made “under duress.”

He continued: “It's a (flawed) valuation. It has no basis in reality. It matters; it matters a lot.”

If the Steering Committee's contention proves out and the Rothschild percentages are found to be wrong, presumably every other calculation used to arrive at the bid amount would also be wrong.

That was not the only issue over which the dueling bidders clashed.

Additional issues being litigated Friday concerned the use of credit bidding by the Steering Committee; whether the committee had the right to credit bid all of the first lien debt; who shares in the distribution — specifically whether any of the second lien holders can receive a payout if the first lien debt has not been completely paid; and finally, whether Icahn — who holds a majority of the second lien debt and a portion of the first lien debt — has standing to participate in the auction.

WestPoint bankruptcy attorney Michael Walsh described the auction as “a grueling process,” but said the final result “added very significant value to the estate.”

The start of the June 23 auction was delayed by three hours to allow time to change errors that had been found in the premium calculation. The bidding and overbidding was active, with counter-bids coming in intervals that ranged from a five-hour hiatus to 30 seconds.

The auction opened with a $617 million baseline bid by Icahn and ended with the $704.5 million final bid.

The bidding process provides the potential for an increased payment to second-lien lenders of $96 million of the $165 million in outstanding debt that they're owed. That's up significantly from the original payment of $10 million in second lien lender debt.

Rothschild's Augustine testified Friday that his company marketed WestPoint to approximately 111 potential financial and strategic investors. They included 99 private equity companies — the Ross and Icahn groups among them — and 12 other strategic investors that had some comparability to WestPoint.

Of the 111, 27 signed a confidentiality agreement and 11 took the next step of becoming qualified bidders, but in the end only the Ross and Icahn groups submitted bids by the June 10 deadline.

After some additional questions involving the Ross bid, the bid was initially revised on June 16 and the final bid was submitted June 20, one day before the auction was originally to take place. The auction was ultimately delayed by two days because one of the advisors had a death in the family.

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