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Burlington’s Bonanza: $579M Buffett Offer Ignites Bidding Battle

Burlington Industries said Tuesday that it has agreed to be acquired by Berkshire Hathaway, but bankruptcy investor king Wilbur Ross says “not so...

Warren Buffett Berkshire Hathaway

Warren Buffett, Berkshire Hathaway

Photo By JA GIORDANO/CORBIS SABA

NEW YORK — Suddenly everybody loves Burlington Industries — including the Sage of Omaha.

The U.S. textile industry might be a shadow of its former self with fabric producers terrified of a flood of imports from China and deflation now a fact of life. But Berkshire Hathaway chief executive Warren Buffett is nothing if not counter-cyclical in his investment strategies.(Remember his warnings about the dot-com boom?) Now he’s going as low tech as possible — on Tuesday, Berkshire and Burlington executed a definitive agreement for Berkshire to acquire Burlington in a transaction that would put about $579 million in the pockets of the bankrupt mill’s creditors.

But Buffett isn’t alone in his attraction to Burlington. Also squaring off in what could become a battle is bankruptcy baron Wilbur Ross. Complicating matters further, Robert Lee of Sheffield Merchant Banking, the financial adviser to Burlington’s unsecured creditors’ committee, believes that the sum of Burlington’s pieces could possibly bring in more to creditors than the company kept in its entirety.

The clash emerged Tuesday when Greensboro, N.C.-based Burlington chose Berkshire Hathaway as its white knight. Under the Berkshire agreement, secured creditors would be paid in full, while unsecured creditors would get a return of between 34 and 35 percent on their claims in the form of cash and certain other assets. Existing shareholders would see their shares extinguished.

Burlington, which filed its Chapter 11 petition in Delaware on Nov. 15, 2001, would become a wholly owned subsidiary of Berkshire, assuming there are no higher offers during a mandatory bankruptcy court auction.

A Burlington break-up could deplete its workforce of about 7,600 even further, and add to the considerable woes of the U.S. textile industry, which last year watched more players succumb to bankruptcy and its employment ranks shrink an additional 21,000 to 425,000.

Buffett said in a statement: "Only the very strong will survive in the textile industry — strong in management, strong in worker skills and strong in financial strength. Burlington brings the first two resources to a successful reorganization; Berkshire brings the latter. Burlington will go forth as a company with no debt, talented and dedicated management, and a workforce second to none. It will be a company designed for success."
The court auction could get interesting. Berkshire’s bid provides a baseline for valuating the Burlington operation but, with Berkshire as the stalking horse, other firms might want to see what the Buffett-amplified fuss is all about.

And a fuss over who wins Burlington is pretty much guaranteed: Wilbur Ross told WWD Tuesday that he will make a second play for Burlington.

"We believe that our bid is considerably superior to the bid put forward by Berkshire Hathaway, and therefore, if the company does try to seek approval based on the current play, we intend to rigorously oppose it," the financier said.

Ross’s private equity firm WL Ross & Co. manages funds that are owed $81 million of Burlington unsecured bonds and accrued interest of $1.4 million, as well as $7 million of Burlington bank debt.

Ross built his reputation during his 24-year stint at Rothschild Inc., where he demonstrated a shrewd eye for value among firms headed toward the graveyard. He left two years ago, founded his own firm and is now also chairman of Burlington’s unsecured creditors’ committee.

Earlier in the day, before the Berkshire deal was announced, Ross proposed financing that would have enabled Burlington to emerge in a stand-alone plan of reorganization. The plan called for Burlington’s $28 million of administrative claims and $439 million in secured debt to be paid in full from cash on hand, plus $250 million of new debt.

In addition, Ross’s plan provides that $300 million of bonds and other unsecured claims would be exchanged for 57 percent of the stock of the reorganized company. Bond holders would be issued transferable rights to subscribe for 43 percent of the stock for $85 million. Unsecured creditors would receive proceeds from the sale of nonoperating assets valued at between $20 million and $25 million. Ross would become the majority shareholder.

Buffett and representatives at Berkshire declined comment. George Henderson 3rd, chairman and chief executive officer of Burlington, could not be reached for comment, but a statement issued by Burlington and Berkshire noted that the Berkshire offer would leave Burlington debt-free, other than customary liabilities and certain pre-petition obligations. The bulk of its $1.1 billion of liabilities prior to its filing will be repaid, with the balance eliminated through the bankruptcy process.
Henderson said of the Berkshire agreement in a statement, "This is a very positive outcome for the company, our employees and our creditors. Over the last year our efforts have increased the value of our company and allowed us to achieve a significant level of return for our creditors despite extraordinarily challenging conditions in our industry and the capital markets."

Henderson also noted how other firms have emerged from bankruptcy with excessive debt, only to be faced with renewed fiscal problems. In addition, he noted that Ross’s plan did not allow for Burlington to emerge from bankruptcy debt-free.

The Ross plan was contingent upon Burlington obtaining new debt. In addition, secured creditors would get repaid in cash, but unsecured creditors would only get stock in a reorganized Burlington.

Henderson said in the statement that the company isn’t ruling out a revisit to the Ross plan, but that would also depend on bidding procedures set by the bankruptcy court and other variables.

A Burlington spokeswoman said that procedures would be set up to allow others the opportunity to bid for Burlington. She declined to specify how many proposals the company entertained before deciding on Berkshire’s, or whether the company has received any indication of forthcoming bids during the auction.

Ross said he’s not aware of Burlington pursuing a "systematic" shopping process, or even of other proposals. "I’m not aware of any other bids," Ross said. "There has been no shopping of the company, which indicates to me a very Draconian set of bidding rules that were followed. They made it impossible for a third party to bid for the firm. We think that this is wrong. We’re already bidding more than Berkshire. We don’t understand why, other than perhaps job security, management would accept a lower bid for a higher bid. It is very inappropriate."

Buffett’s Berkshire does have a reputation for keeping management in place after it completes an acquisition.

Sheffield’s Lee, whose firm provides financial advice to the unsecured creditors’ committee, agrees with Ross. He called the Buffett deal a "low-ball offer relative to the value" of Burlington.

Under the Berkshire proposal, Lee explained, the Burlington stock is worthless, the bank debt gets paid in full, and there are still $400 million in trade claims and unsecured bond debt.
"The bonds are trading around 33 cents [on the dollar] and Buffett’s offer is 35 cents, which [means there is] no premium on his bid for the unsecured claims in order to take control of the company. Our perspective is that the value put forth by the Buffett proposal is inadequate," the banker said.

Lee, who expects that higher offers could be forthcoming, noted that, depending on the bidding process, the sum of Burlington’s parts may be greater than its whole valuation per Buffett. He also expects the unsecured creditors committee to file an objection with the bankruptcy court, seeking a court order requiring Burlington to "pursue a proper divestiture process."

Should Berkshire ultimately get the winning nod from the bankruptcy court, Burlington will be the latest in a recent series of purchases for the investment firm run by the sage of Omaha.

Last September, kids were added to Berkshire’s portfolio when the fund acquired children’s clothing maker Garan Inc. in a cash deal valued at $270.6 million. Garan shareholders were paid $60 a share, a 6.8 percent premium.

Also last year, in January, Berkshire received Delaware bankruptcy court approval to buy bankrupt Fruit of the Loom for $835 million. Secured creditors received 100 percent of the equity in the reorganized FTL, as well as $300 million in unsecured debt. The return to unsecured creditors is in the range of $62.6 million, or 7.5 percent of the $835 million purchase price.

Other outright purchases now under the Berkshire umbrella include, in July 2000, Ben Bridge Jeweler, a 65-store West Coast retailer. According to Berkshire’s 2000 annual report, Buffett heard about the jewelry chain through Barnett Helzberg, from whom Berkshire bought Helzberg Diamonds in 1995. Another July 2000 acquisition was Justin Industries, which makes Western boots under the brand names Justin, Tony Lama, Nocona and Chippewa. Earlier acquisitions include Borsheim’s Fine Jewelry, Dexter Shoe Co., H.H. Brown Shoe Co. and Lowell Shoe Co.

Other fashion firms that have held Buffett’s interest are those classified as stock investments — purchases of shares of firms such as Liz Claiborne, Jones Apparel Group and Gap. Obviously, whether it’s companies Berkshire owns outright or those that are solely investment interests, Buffett is attracted to names that have a certain amount of brand equity among consumers. Top consumer brands associated with Berkshire are two that the fund owns: Benjamin Moore Co. and The Gillette Co. It also has an investment interest in The Coca-Cola Co.
An investment banker who has worked with Buffett on previous deals, observed, "Buffett favors top consumer brands because they have a good name, have a good management team and generate a certain amount of consumer loyalty for the brand. In the case of Gillette, it has a steady customer pool to sell to because men every day need to shave and razors need to be replaced. The same is true for Fruit of the Loom; it is a commodity product that people need to wear."

For the fourth quarter ended Sept. 28, Burlington reported net income of $36.1 million, or 67 cents a diluted share, compared with a net loss of $76.7 million, or $1.46 a share, a year earlier. The income included $62.4 million in income tax benefits, as well as $21.1 million in pretax restructuring costs. Sales were $220.9 million, down 32.5 percent. The company’s apparel fabrics operation narrowed its deficit, recording a $2.9 million loss before taxes, compared with a $13.1 million loss in the prior-year quarter. Sales at that unit fell 34.7 percent to $107.6 million.

The company said it cut its apparel fabrics manufacturing capacity by half this year. It has moved its apparel headquarters to Hong Kong, where the Burlington Worldwide division now sells apparel fabrics manufactured at Burlington’s plants in the U.S., Mexico and India, as well as fabrics made under contract by independent mills throughout Asia. One source inside Burlington feels that its increasingly global scope was one of the elements that appealed to Buffett.

For the year, Burlington recorded a $100.8 million net loss, which came to $1.89 a diluted share, deeper than the $91.1 million, or $1.73 a share, deficit last year. The loss included $146.5 million in income tax benefits and $165.8 million in pretax restructuring charges. Sales slipped 29.2 percent to $993.3 million.