Greensboro, N.C.—Just as Floor Covering News was going to press, Mohawk Industries announced it will finallize its purchase of Burlington Industries’ Lees carpet business for $352 million before the year ends. This is the result of an agreement Mohawk made with W.L. Ross & Co., an investment firm specializing in distressed assets, which is trying to purchase bankrupt Burlington. The textile firm, which owns Lees, filed for Chapter 11 bankruptcy in Delaware 18 months ago (FC-News, Nov. 30/Dec. 3, 2001). On July 25, Burlington designated Ross’ $608 million acquisition proposal “as the highest and best of several bids received in connection with the sale process approved last May by the court in its reorganization proceedings.” The bid price has since been revised upward to $620.08 million due to the sales process approved by the court overseeing Burlington’s reorganization proceeding. The new price calls for $614 million in cash and a $6.08 million credit for enhancement of the break-up fee. Otherwise, all aspects of the original Burlington/Ross agreement remain unchanged.

Burlington said under the Ross agreement all secured creditors will be repaid in full and that distributions to unsecured creditors will be approximately 41.5% of allowed unsecured claims. This amount is estimated and is based on a number of assumptions meaning the final amount could be different. George Henderson III, Burlington’s chairman and CEO, said, “We are pleased that the bidding process is coming to a conclusion and we believe it will enable us to maximize the value of the company and produce the best results for our customers, employees, suppliers and creditors.” Burlington has not released the names of the other bidders. Effective Process Bob Lee, managing member of Sheffield Merchant Banking Group, the financial advisor to the Official Committee of Unsecured Creditors, said, “The Burlington management team and its advisors ran a very full and effective process. The committee supports the proposed transaction and is pleased that this process indicates an improvement from prior offers.

The only other “offers” that have been made known publicly is the $579 million cash bid by investor Warren Buffett’s Berkshire Hathaway, which also owns Shaw Industries, as well as a couple of flooring’s most prominent retailers—Nebraska Furniture Mart and RC Wiley. That bid, announced earlier this year ( FCNews, Feb. 17/24), was protested by Ross as being too low. Ross actually owns close to $100 million in face value of bonds in Burlington and chaired the manufacturer’s creditors committee. Reports say he has since stepped down to avoid a conflict of interest. But, at the time, Ross was instrumental in having the Berkshire bid rejected (FCNews, Feb. 3/10), arguing the bid was not only too low, but also objecting to a $14 million break-up fee, saying it made it more difficult for others to outbid the Berkshire offer. He not only won a court decision calling for the rejection of the break-up fee, but judge Randall Newsome then approved a plan to sell Burlington at auction. This action, in effect, dissolved the Berkshire bid.

Upon hearing that Burlington has chosen his offer, Ross was quoted as saying, “We’re delighted. It totally vindicates judge Newsome’s wisdom to have a proper sale process. Now the employees of Burlington will no longer have to worry whether they are working for a viable company.” Burlington said if the Ross bid goes through, the two companies expect the deal to close in October. If Ross succeeds, he plans to spin off the Lees division to Mohawk as his interest currently seems to be in textile mills. He also owns about $90 million in face bond values in Cone Mills, one of Burlington’s rival textile makers, and a company that has been rumored as a possible buyer of Burlington’s denim operations in Mexico, especially since Ross has agreed to help it build such a plant there. “We are very interested in textiles,” he was quoted as saying, “so you should expect other activity on our part in the industry.” In fact, he has joined other domestic textile mills in lobbying the federal government to tighten trade restrictions for importers, claiming the current codes, which will expire in 2005, are unfair to U.S.-based producers.

Harsh Comments When Burlington first filed for bankruptcy, Henderson cited this as a prime reason and made a number of harsh comments toward the government, especially since the mill’s foreign operations, namely Nano-Tex and Burlington Worldwide were not included in the filing: “A key factor that led Burlington to take these steps is the U.S. government’s history of using the textile industry as a bargaining chip in international relations. The results have been devastating for the industry, leading to job losses, plant closings and liquidations. Imports have been growing rapidly for many years, but since 1999, the volume of imported apparel has grown at five times the rate of consumption, squeezing our U.S.-made products to the point that four out of five garments sold in this country are imported.” He added, the government “has made no effective response to these unfair trade practices and our industry does not have the reciprocal access to the markets of exporting countries.”

Burlington is actually one of dozens of textile makers that have filed for Chapter 11 in recent years, with each noting how hard they have been hit from unfair prices by foreign suppliers. While Ross feels “elected officials are starting to understand the difference between free trade and foul trade,” he noted the country is still “very lax about enforcing bilateral and multilateral agreements.” As for the Lees transaction, Mohawk announced on July 21 that it and Ross entered into an agreement in which the flooring company would acquire the assets and assume certain liabilities of Burlington’s carpet division, i.e. Lees. Though both sides would not comment on the agreed upon purchase of the Lees division, a July 25 Reuters story stated it was $350 million, citing “a person close to Burlington.”

Upping The Bid Three days later, the news organization again cited a “person familiar with the situation” in noting Mohawk “raised its bid in the auction.” Other than confirming the deal, the only other comment Ross had was, “Lees will benefit from Mohawk’s financial strength and business synergies.” Analysts tracking the flooring industry and those following Burlington note that Lees is pretty much the crown jewel in the textile maker’s arsenal. In fact, at the time it filed for Chapter 11, the company called it a highly successful business. Henderson said, “It continues to serve the market with innovative flooring solutions and industry firsts.” In fact, a July 22 business report in North Carolina’s News & Record has analyst Tom Lewis of C.L. King & Associates calling Lees, “the most conspicuous piece of value in Burlington.”

Over the first three months of this year, Burling ton reported the Lees division had an earnings increase of 21.1% compared to the first quarter of 2002—from $7.1 million to $8.6 million. Burlington, which has sales of about $1 billion last year, actually lost $8.9 million during the first quarter of this year. Saying the acquisition makes sense, Lewis noted “Mohawk stands out as a company that has the cash flow and, obviously, the know how to be able to [keep Lees moving in the right direction].” Last year, Mohawk’s annual sales topped $4.5 billion, and this year they should surpass $5 billion now that has the benefit of a full year’s sales from its Daltile division. Upon hearing the news that Lees should be moving under the Mohawk umbrella, employees such as Alex Jauregui, executive vice president/general manager of Lees Squared, was excited. “It’s great to have a parent company with the economic strength of Mohawk. I feel very confident in it.”