Why Icahn Needs WestPoint

March 6, 2008

Why Icahn Needs WestPoint

(Part I)

In late June, 2005, when Carl Icahn emerged from bankruptcy court with the free-and-clear remains of WestPoint Stevens in his pocket, the very first question I asked him was, “Now that you have it, what are you going to do with it?”

He answered by talking about the $200 million cash infusion he was going to make in the company and about the possibility of a public offering to bring in an even larger investment. He spoke about turning it into a global sourcer — and, yes, maybe even a global source — for home textiles products. But his victory was then only a few minutes old, so he could be forgiven for dancing a bit and being a little hazy on the details. Carl Icahn is an investor — a big picture kind of guy.

The real answer continues to develop before our eyes and ears. In the 31 months since the sale closed, the new WestPoint International, nee WestPoint Home, has fought back valiantly, if mostly inconspicuously. It’s clearly lost a bit of shelf space, even by its own admission in public, but it’s also saved some critical placements. There hasn’t been much in the way of new product knockout punches, although it has dressed up the line nicely. And it will probably be a while longer before it gets the knack of turning on a dime. Nimble is a work in progress.

But give WPH lots of credit for working hard on the fundamentals through more than its fair share of annoying distractions. That is exactly what it must do before it can move on to the sizzle side (everything’s relative) of the business.

It has made critical capacity investments in Bahrain and Pakistan. And, yes, of course it would have been better if this whole Pakistan thing wasn’t happening, but that kind of thing goes on all the time and it really hasn’t affected production or the movement of goods. Just the same, who needs this meshugas?

And just when it seemed to many in the trade that its prized possession might be a goner — at least partly from the Icahn Effect — it may have been Icahn himself who saved the Ralph Lauren Home license by assuring RL he’d still love them and WPH in the morning. So Ralph bought in, at least for another year. Not exactly a ringing endorsement, but a save is a save, is a save. Similar scenes may have played out with some retailers.

That is, after all, the paradox of the Icahn Effect. Carl Icahn didn’t win his street creds for being a strategic investor. His investment horizon is frequently short — three to five years, perhaps. I’m sure he’d like to argue that point but right now he’s probably a little busy with proxy season coming up. Oh, and he’s been watching all those retailers — talk about a group that could use an activist investor or two. And that might be another way to beef up WPH’s base. (Think he’ll show at Penney’s annual meeting? Nah.)

Icahn may have saved WestPoint but he’s also the reason why some its customers are adopting their own hedging strategies. He and WPH execs are spending a lot of time dealing with those issues and making the case —without actually using the words, of course, lest they fall into a fit of coughing — that he’s really a white knight in for the long haul.

Truth be known, Icahn has always viewed himself as a white knight, jousting to defend the honor of investors everywhere. It’s also true that one person’s white knight is another’s Vlad the Impaler. And your long haul might be my New York second.

Then there’s that pesky lawsuit. You know, the one that might result in Icahn losing control of WestPoint. Recent disclosures about that may offer some insight into why Carl Icahn really needs WestPoint — maybe even more than it needs him.

More on that next time.