Li & Fung Takes the Lead on Homestead

Reno, Nev. — An affiliate of Li & Fung may emerge as the new owner of Homestead textiles, unless a competitive bidder emerges before a tentative Nov. 17 auction, according to company principals and documents filed with the U.S. Bankruptcy Court here.

Homestead is the remaining asset in the London Fog Group bankruptcy filed last March. Millwork Trading, part of the Li & Fung group, has made a stalking-horse bid for the firm valued at about $7.8 million under a Section 363 asset sale that will use the proceeds to fund a Chapter 11 liquidation.

Others are reportedly looking at Homestead with an eye toward making a competitive bid that would lead to an auction if they qualify. A competitor would be required to make a minimum $200,000 first overbid, according to a proposed bidding procedures order. Millwork has made a $400,000 good faith deposit toward the closing of the sale, which must occur no later than Dec. 15, 2006.

"There are other people actively looking at Homestead," Homestead president David Greenstein told Home Textiles Today. "I can't say who, but they are definitely looking and it's going to be interesting."

Under the stalking horse, a new Homestead would emerge under the Li & Fung corporate structure and executives said it will become the fashion bedding arm of the sourcing company. Homestead president David Greenstein would head up the Li & Fung fashion bedding effort, with other members of Homestead's top management coming over as well.

"Homestead is going to dramatically change our opportunities," said Li & Fung USA president Rick Darling last week. "We consider [David] to be a very important part of this process.

The acquisition of Homestead would come at an interesting time for Li & Fung. Last week, Darling announced that, unrelated to the Homestead buy, Jack Toolan had left as head of the Home Brands Group to take a position in a consumer products company outside of home textiles. At the same time he named Scott Maddelene, senior vp of the home business, to take control of the commodity bed and bath business with an eye toward "building out infrastructure and shelf space."

"Commodity sheets and towels are a distinct type of business and have to be treated very differently than the fashion top of bed business," Darling said.

He said Li & Fung was also looking at other deals.

"We are in productive discussions with what I consider pretty solid companies," Darling said. "We're looking at a range of things, from acquisitions to forming coalitions with companies that fit. We're very flexible."

If it happens, the Homestead sale would include most of its assets, licenses and trademark agreements, including Angela Adams, Collier Campbell, Lisa Jenks, Peacock Alley, Galbraith & Paul, Preston Bailey, and Nancy Koltes. The sale is also contingent upon employment agreements with Steven and David Greenstein, who headed Homestead.

"We have an understanding with Li & Fung…and it is going to be a very good, fair deal for Homestead management," Greenstein said.

The proposed purchase price is $250,000 in cash, plus 43% of Homestead's standard cost of inventory, 85% of the face value of eligible accounts receivable, and other considerations. Elsewhere, the court documents indicated the total value of the purchase might be about $7.8 million.

Homestead's receivables are its largest hard asset, Greenstein confirmed, adding that he welcomes the Li & Fung deal. Homestead, he noted, "has been in Chapter 11, and future investments have to be made in the company beyond the purchase price to make it grow. That's one of reasons we were prepared to do a deal with Li & Fung — because we believed they would have the necessary financial power to make sure that we could continue to grow that business with all the necessary capital to do that."

Greenstein said he believes Homestead would retain its identify under the Li & Fung umbrella.

"Homestead is known for its fashion bedding and forthright trends, and Li & Fung is more known for its sourcing capabilities and its expertise in commodity items," he said. "I feel more than comfortable. I have very strong aspirations about what should happen in the home textiles business and I think we'll birth one of the more important players in home textiles for the next decade."

According to Greenstein, Homestead has paid down most of its secured debt, listed as more than $75 million at the initial filing, and this final sale should pay off most or all of the remainder.

In question is a portion of the secured debt outstanding to DDJ Capital Management, Homestead's largest remaining debt-holder, which is currently being sued by the committee of unsecured creditors. The judge in the case has ordered a $9 million set-aside pending the outcome, according to creditors committee attorney Jeff Garfinkle.

"The unsecured creditor pool ranges, depending on a pension liability and some contingent claims that have yet to be liquidated, between $15 million and $25 million," Garfinkle said.

A Section 363 sale is a bankruptcy court-sanctioned sale of a company's assets. It gives the court, if needed, the ability to "cram down" a reorganization plan commonly monetizing a company's assets to seek both the maximum and immediate cash value — factors that often play mostly to the benefit of the secured creditors.

It was Homestead, under Greenstein, that brought London Fog out of its earlier bankruptcy in 2004 with a $100 million purchase. Following the more recent filing, the company sold off the London Fog business for $37.5 million in August, and sold its Pacific Trail unit for $20.4 million last April.