Ball in Icahn’s Court

As WPS Awaits Challenges Value of Debt Could Be Key in Clash of Takeover Titans

Brent Felgner, Staff Staff, March 21, 2005

New York — It’s Carl Icahn’s move.

After seven months spent unsuccessfully trying to reach consensus on a reorganization plan for WestPoint Stevens, the mill has accepted Wilbur Ross’ stalking horse bid, leaving Icahn, who holds first- and second-tier debt in the bankrupt mill with limited choices.

He could challenge the Ross plan in bankruptcy court. He might launch his own bid for the company’s assets via a possible June 7 scheduled auction. He might simply decide to get on board with the Ross plan, or he might use the threat of two of those choices to leverage better terms for his payout on investments in WestPoint.

But nearly three weeks after the Ross buyout emerged, Icahn has not yet publicly shown his hand, despite back-channel rumblings of an impending challenge.

At least partly at issue seems to be the fate of Icahn’s share of the second-tier debt payments — valued at $10 million by the Ross plan, as long as there is no objection moving forward. But the broader issues are much more involved and costly, and foster speculation of two takeover giants in an arena-like battle of business acumen and, perhaps, ego.

Icahn did not immediately respond to telephone requests for comment last Friday.

But in a telephone interview Friday, Ross indicated he was prepared for any eventuality.

“Obviously there’s no reason to be discussing that strategy in the media,” Ross said.“We’ll just see what happens, and we’ll try to deal with it.

“Carl is a very experienced operator in bankruptcies,” he continued. “I’m sure he will do whatever he feels is best for his own enlightened self interest.”

From bankruptcy court pleadings, what is clear is that Icahn, along with other secured and unsecured creditors, spent months bumping heads, ultimately rejecting every effort to reach consensus — there were at least seven including actual reorganization plans — put forward by WestPoint in its bid to emerge as a going forward operation.

“This is bankruptcy and one of the problems with bankruptcy is there is never enough to go around to give everyone everything they want,” Ross said. “So it’s not at all unusual to have a lot of wrangling and bickering in a bankruptcy.”

At the end of it all, the company opted to present the Ross plan to the court as its most viable option.

“The domestic textile manufacturing industry is facing a life-or-death challenge from foreign manufacturers that enjoy lower labor and raw-material costs,” WestPoint stated in recent bankruptcy court filings. “Although domestic companies can still provide superior service and shorter lead times, major domestic customers increasingly are willing to forgo those advantages for lower prices. WestPoint commenced these Chapter 11 cases to improve its ability to compete in this marketplace by reducing its debt burden.”

Ross’ plan, valued at $687.5 million, consists of a $480 million direct buyout from WL Ross & Co., Ross’ investment firm, with another $207.5 million coming through a rights offering.

To date, no challenges or competitive bids have emerged, and Ross said he was unaware of any that might be pending.

“Frankly, that’s not very indicative because there’s some time before they have to do anything,” Ross said.

The proposed deadline for qualified bidders to make their move is May 23. The auction is slated for June 7 and the bankruptcy court approval would take place June 15 — two years, almost to the day, since WestPoint filed for Chapter 11 protection.

Objections to the auction or the bidding procedures and terms must be filed by June 1.

The court filings also offer a glimpse of a tortured process in which three levels of creditors — first and second tier secureds, and the unsecureds — fought over the company’s limited assets and limited ability to pay everyone what they thought they should receive. The battle, however, appeared to have raged principally among the holders of first-tier debt.

The WestPoint efforts to arrive at a consensus — all unsuccessful — consisted of:

• A valuation of WestPoint as a going concern on Sept. 20, 2004.

• A term sheet outlining a potential restructuring plan on Oct. 8, 2004.

• A draft Chapter 11 plan on Nov. 30, 2004.

• A draft disclosure statement on Dec. 10, 2004.

• Continued discussions aimed at finding a compromise.

• A final “compromise” Chapter 11 plan on Jan. 20, 2005. That plan provided for a five-person board of directors: two appointed by the steering committee, two appointed by Icahn and one appointed by a new investor.

“Even the upper limit of the range of values in the report (prepared by Rothschild, Inc.) is not sufficient to cover the claims of the First Lien Lenders, Second Lien Lenders and lenders under the company’s debtor-in-possession financing,” WestPoint stated in its filing for approval of the stalking horse plan. “Given the relative size of the claims of the First Lien Lenders compared to the Second Lien lenders, it is apparent the First Lien Lenders will control the restructured company.

“Unfortunately, the limited enterprise value, coupled with the existence of opposing factions among First Lien lenders, has made it impossible to reach agreement on the terms of a Chapter 11 plan.”

The documents cited the first-lien creditors’ steering committee, composed of Satellite Senior Income Fund, CP Capital Investments, and Contrarian Capital Management, which control 51 percent of the group’s claims. Icahn, the filing stated, controls or owns 40 percent of the first-lien debt plus 50 percent of the claims held by second-lien holders.

“The Steering Committee has ‘blocking position’ with respect to the class of claims held by the First Lien Lenders and Icahn has a ‘blocking position’ with respect to the classes of claims held by both the First Lien Lenders and the Second Lien Lenders,” the court papers continued.

“The problem facing the debtors is that both the Steering Committee and Icahn demand control of the restructured company and have not been able to reach a compromise, even with the assistance of the debtors.”

And even though the company could have proceeded to continue filing new plans and seeking new compromises, “The inflexibility of the two groups convinced the debtors that such an exercise would be a waste of time and money,” the pleading stated.

That, said WestPoint, left no alternative other than selling to a third party — Ross — and then liquidating the old, by then emptied, corporation.

The Ross plan, WestPoint argued, provides a “clear path” for emergence and “solves the stalemate.”

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