Judge Denies Berkshire’s Breakup Fee

Wilmington, DL, Feb. 28—The bankruptcy judge overseeing the Burlington Industries bankruptcy has denied a motion to authorize Burlington to pay Berkshire Hathaway a $14 million breakup fee should Burlington sell to another entity. The ruling allows Berkshire to scrap the deal if it chooses, according to the terms of the asset purchase agreement. Berkshire has bid $579 million plus the assumption of at least $50 million in liabilities to acquire the assets of Burlington. Before the ruling, Charles Peters, Burlington's chief financial officer, testified that Berkshire would walk away from the deal if it wasn't eligible to receive the breakup fee. Peters said such a move would be devastating to Burlington's creditors, customers, and suppliers. Judge Randall J. Newsome of the U.S. Bankruptcy Court in Wilmington denied the breakup fee because Burlington failed to show evidence that Berkshire Hathaway, in its role as the opening bidder for the company, provided value to the Chapter 11 estate. Under the bankruptcy code, a court may authorize a payment of a breakup fee to an opening bidder if the assets are sold to another entity at a higher price. Judge Newsome said that because Berkshire Hathaway came to Burlington unsolicited, it didn't need to be encouraged to bid on the assets. Judge Newsome also said that there was no evidence Berkshire Hathaway's bid has started a bidding war for Burlington's assets. "This is a decision governed solely by the law, not by what may happen to the debtor, not by expediency," Judge Newsome said. "This is a tough situation. There has been testimony that the creditors are against the breakup fee. But on the other side, I have a $580 million cash deal plus the assumption of post petition trade debt, retiree health benefits, and covering the shortfall in pension plans. That's a lot of value to let walk away." Judge Newsome's decision is a victory for Burlington's committee of unsecured creditors, which had objected to the deal. The creditors' committee holds more than 70% of Burlington's roughly $140 million in unsecured debt, according to Wilbur L. Ross, chief executive of WL Ross, a private equity firm heading the committee. Ross wants to finance a stand alone reorganization plan in an effort to increase the distribution to unsecured creditors. He is owed roughly $80 million. Ross said he could not imagine a worse time to sell the company. He said he believes Burlington is turning around and it has a lot more value. The creditor panel's experts value Berkshire's bid at $412 million rather than $579 million, largely because Burlington will transfer roughly $150 million in cash to Berkshire under the proposed deal. In contrast, Peters, Burlington's CFO, said the deal is better than his company could have hoped for. "It provides a very solid all cash offer that is a significant improvement in return to creditors than where we were at the beginning of the case." Burlington initially projected paying 65% of its secured claims and 5% of its unsecured claims, according to Peters. The Berkshire bid, made earlier this month, would allow Burlington to fully repay $439 million in secured debt and pay its unsecured creditors $140 million, a payment equaling 35% of the unsecured claims. Judge Newsome did approve bid procedures which put Burlington on track to seek court approval of the sale in April. The question now is whether or not Berkshire Hathaway will keep its bid on the table.

Related Topics:Shaw Industries Group, Inc.

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