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Part II: Why Icahn Needs WestPoint

March 10, 2008

Part II: Why Icahn Needs WestPoint

There’s money to be made with WestPoint International — above-market returns to be scratched out as it is cleaned up, refocused and (pick one) spun off or sold off, in whole or pieces. Carl Icahn makes money; that’s what he does perhaps better than anyone else.

Ever the strategist, Icahn trumped the other secured lenders nearly three years ago by taking his junior secured debt, acquiring some senior debt and combining them to win the company out of bankruptcy. He beat the other secureds even after they brought in investor Wilbur Ross to duke it out.

So for now, at least, Icahn owns 67.7% of the common stock and 100% of the preferred stock of WPI, but that status remains in hot contention by the other group of first tier creditors. They challenged the bankruptcy judge’s decision on appeal and won a remand order sending it back — an instruction to the judge, a former private equity partner himself — to get it right. A subsequent lawsuit in Delaware state court is also challenging Icahn’s preferred stock holdings.

Icahn has fought like hell to keep the company, and for months the common speculation was that it was simply his super-charged competitive nature (read: ego) that’s kept him in the fight. He does love to mix it up, as we’ve seen over these many years. But he’s walked away from much bigger deals involving much more money, never really hesitating to make the tough business decision.

When Icahn discusses WestPoint and The Fight, he becomes highly animated in his insistence that he’ll prevail. But ego and the prospects of a good old-fashioned dust-up alone can’t explain his perseverance. Why?

At least one answer might be found in an Icahn Enterprises debt prospectus filed with the Securities and Exchange Commission last New Year’s Eve. Buried deep in the filing might be the reason Icahn not only wants to keep WPI, but why he absolutely needs to keep it.

It’s called the Investment Company Act of 1940, and it’s an important part of the SEC’s enforcement cache. And, it appears to play a role in Icahn Enterprises’ strategy.

The document explains that if the courts rule against him and IEP’s interest in WestPoint falls below 50%, it is in danger of “inadvertently” becoming an unregistered investment company, losing its holding company status. The SEC restrictions are extensive and severely adverse to IEP’s interests, limiting its operating methods, management, capital structure and transactions.

“Registered investment companies are not permitted to operate their business in the manner in which we operate our business, nor are registered investment companies permitted to have many of the relationships that we have with our affiliated companies,” the filing disclosed.

“In order not to become an investment company required to register under the Investment Company Act, we monitor the value of our investments and structure transactions with an eye toward the Investment Company Act. As a result, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions due to those concerns.”

Fines, penalties, injunctions and an unraveling of deals could be in the enforcement mix, the document warns. But for Icahn, is this alone worth the relatively high cost of WestPoint? Probably not, which is why the company must still find ways to succeed in its marketplace.

Icahn likely would say this is a lot of garbage if he spoke about it publicly— mere legalese. But the warnings in the filing are what they are.

The Icahn Empire is clearly not at risk because of WPI. But a change in control would surely impact WestPoint’s future, and it’s impossible to say how. While Icahn’s ownership has provided more than a little distraction for executives, employees and customers, alike, his sudden absence only to be replaced by a new cadre of hedge fund owners, would surely do no less.

Life with Carl Icahn is never easy if you’re on the receiving end of his acquisitive affections. And as WestPoint approaches its three-year anniversary under his control, it will become even less so as the time to show results nears. By this point, Carl Icahn has become the known quantity; WPI executives must find a certain ironic security in that.