Icahn's WPS Bid Raises Questions

New York —Carl Icahn's competing bid and proposal to buy WestPoint Stevens for $800 million offers little insight into his plans for the company, should he succeed.

But at a minimum, his offer at least contemplates a Chapter 7 conversion as either a forced sale or on a short-term operating basis, stating either would be preferable to the alternative: Wilbur Ross.

The Icahn offer — through his affiliate company, Aretex — came to light last week in papers challenging the stalking horse proposal from Ross and bidding procedures for a proposed June 7 auction. Those, and at least eight other objections to the Ross plan, will be initially considered in a hearing this Thursday in the U.S. Bankruptcy Court for the Southern District of New York.

Icahn and the second tier lenders as a group are seeking a full evidentiary hearing May 9, along with an order compelling WestPoint, Ross and investment advisor Rothschild to submit to discovery, including documents and depositions.

The Icahn proposal stands in stark contrast to the Ross plan, which was made at the behest of the steering committee of first tier lenders and endorsed by the bankrupt mill's management.

The Ross plan, which totals $687.5 million, essentially liquidates the existing corporation, but a new operating entity emerges on the other side that will continue, for all intents and purposes, as WestPoint.

“The real question is not how a person values (Icahn's) bid, but how will WestPoint Stevens and their financial advisors value the bid,” Ross said when reached by telephone last Friday. “I think that will become clear by the time of the hearing Thursday.”

Central to Icahn's complaint is that his broad interests in the mill are being underrepresented and steamrolled, and that his bid to buy the assets is being ignored.

He objects that the steering committee may credit bid 100 percent of the first lien debt without the consent of all first lien holders. Credit bidding permits outstanding debt to be bid as if it were cash.

Icahn also complained that the Ross' buyout proposes to pay administrative and priority claims over those of the second-tier debt holders, proposing the latter receive up to $10 million. Icahn's affiliate company, Aretex, holds 52 percent of the second tier debt in addition to about 40 percent of the first tier debt.

“As the largest creditor in these cases (with aggregate first and second lien debt of approximately $270 million), Aretex has the most at stake in maximizing value here,” Icahn's court papers stated

The battle comes down to which creditors get paid and how much, as well as the company's operating status moving forward. That also seems to be at the core of the WPS management decision to endorse the Ross plan. There is no dispute that WestPoint's enterprise value is insufficient to pay all of the claims. Unsecured claims alone amount to well over $1 billion

Icahn did not return several calls seeking comment. “Our position on (a potential Chapter 7 liquidation) is spelled out clearly in our filing,” said Aretex attorney Jo Christine Reed.

The papers argued that the Icahn plan represents the best interests of the creditors: “Here, where Aretex is willing to buy prior to a (Ch. 7) conversion or possibly, from an operating Chapter 7 trustee promptly upon conversion, the proposed transaction with Wilbur Ross and the Steering Group is much worse for the holders of Second Lien Debt than a Chapter 7. A Chapter 7 does not need to be a fire sale.”

Icahn argued that a Chapter 7 would obviate the need to pay off those administrative and priority claims, enabling second tier and “superpriority” debt holders to be paid.

Among other things he argued that “the costs of trying to confirm an unconfirmable Chapter 11 plan, would be much less” than the costs of a Chapter 7.

Beyond those striking differences in the two plans, the Icahn challenge termed the Ross plan “fatally flawed” and “dead on arrival.” It effectively removes most stalking horse bidding protections from Ross — or at least adds them co-equally for Icahn by formally designating Aretex as a qualified bidder. It proposes to eliminate the $5 million dollar break up fee for Ross, should his company be outbid at the auction.

“We are where we are,” Ross said. “The company has selected us to be the stalking horse. We'll respond to his objections and we'll see what the judge says at the hearing.”

Objections from several filers, including Icahn, termed the Ross plan “sub rosa” — essentially a backroom deal.

“To proceed as they (WestPoint) request will inevitably waste time and assets of the estates in what appears to Aretex to be little more than an effort to unfairly advantage Wilbur Ross and the Steering Committee at the expense of creditors,” the Icahn company argued.

And instead of negotiating adequately with Aretex, the WPS management “rushed” to cut the deal with Ross, the filing claimed.

In the process, the structure of the currently proposed bidding process has been “skewed to discourage rival bids and transactions and needs to be altered to provide for a level playing field,” the Icahn company argued.

Moreover, the steering committee has no authority to authorize or credit bid Aretex's 40 percent of the first lien debt without its consent. “This effort is without precedent … and is essentially an effort by the Steering Committee to take the property of Aretex without its consent in a manner that Aretex views as little more than common theft.”