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Will Buffett Give Mills a Bump?

After Warren Buffett’s decision to buy bankrupt Burlington Industries, textile executives are wondering if the sector’s investment climate might improve.

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Keith Hull, of Avondale Mills Inc., called Buffett’s bid for Burlington “an interesting turn of events, but it hasn’t become a fad yet.”

WWD Staff

NEW YORK — Textile stocks may be in for a Buffetting.

Following this month’s news that investment guru Warren Buffett is interested in buying bankrupt Burlington Industries, textile executives are stepping back and wondering if the textile investment climate might improve.

For the last several years, textile stocks have been ill-favored by the financial community. Major mills, including Guilford Mills Inc., Galey & Lord Inc. and Burlington, have lost their listings on major stock exchanges and now trade over-the-counter. Major equity analysts who followed the textile industry lost their jobs or found themselves transferred into different functions.

The four mills that remain listed on major exchanges — Cone Mills Corp., Delta Woodside Industries Inc. and Dan River Inc. on the New York Stock Exchange, and Fab Industries Inc. on the American Stock Exchange — all trade for dollars a share, with market capitalizations that range from about $20 million to $75 million.

At the close of its 1995 fiscal year, when Burlington’s revenues peaked at $2.21 billion, the company’s market capitalization was north of $820 million. At the close of trading Tuesday, Burlington’s market capitalization was $1.6 million.

But investors tend to follow where Wall Street successes like Buffett’s Berkshire Hathaway Holdings lead and executives said his $579 million cash bid for the bankrupt giant may make it a little easier for other mills to raise the capital they need to expand operations abroad.

“It’s a great thing when somebody of Warren Buffett’s stature and track record is investing in our industry,” said James Martin, president of apparel fabrics at Danville, Va.-based Dan River. “Warren Buffett doesn’t invest in things that he doesn’t think are going to make him and Berkshire Hathaway money — which is his job — and he seems to have a good track record.”

Buffett is not alone in his interest in Burlington. Investor Wilbur Ross of W.L. Ross & Co. has made a larger, but more complicated, offer for Burlington. His proposal called for paying off Burlington’s $439 million in secured debt and $28 million in administrative claims in cash, to issue $250 million in new debt and to give the company’s creditors a 57 percent ownership stake in the company.

Their bidding war will potentially play out in bankruptcy court. A hearing is scheduled for Friday to review the procedures Burlington is using to evaluate offers.

Some observers said the news has sparked a new glimmer of interest among investors who, given the collapse of the dot-com bubble and the generally lagging stock market, have been on the lookout for new opportunities.

“From the banks to the factors to the stock analysts down on Wall Street, they’ll be taking a second look [at the textile industry],” said consultant Mary O’Rourke, of New York’s Jassin-O’Rourke Group.

“They’re stopping and saying, ‘What does Warren Buffett know about the textile industry?’” she added, noting that her office had been contacted by some potential investors in the weeks since the Buffett news broke. “That will probably prompt some more interest in mergers and acquisitions.”

Attracting investment has been a major hurdle to textile companies for the past few years. Cone Mills last month said it planned to sell $27 million in bonds that could be converted into stock to help fund expansion in Mexico. The buyer is to be Ross’ company.

That proposal prompted one dissident Cone director, Mark Kozberg, to protest. He plans to bring his complaints before other shareholders at the mill’s annual meeting. But Cone officials have said that low investor interest in the firm’s shares has made it necessary to explore alternative ways of raising money.

While Buffett’s move may have some investors thinking about textile companies again, it hasn’t yet resulted in a flood of new investment. The prices of major textile companies haven’t spiked upward since the news broke. (See chart, this page.)

“It’s an interesting turn of events, but it hasn’t become a fad yet,” said Keith Hull, president of marketing and sales at privately owned Avondale Mills Inc., which has some public debt. “People with some farsightedness and some degree of risk are bound to check things out, but the banks and traditional lenders are still cautious.”

The biggest equity investment question floating around the textile industry at this time is DuPont’s proposal to spin off its $6.5 billion DuPont Textiles & Interiors division this year through an initial public offering, if market conditions allow. If Buffett’s deal sparks renewed interest in the sector, that could bode well for DTI.

DuPont officials could not be reached for comment.

Buffett has a history of buying ailing companies — he last year bought Fruit of the Loom out of bankruptcy — and the reasons for his investments aren’t always immediately clear to other investors. Buffett could not be reached for comment for this story and Burlington chairman and chief executive George Henderson declined comment.

One source suggested that Buffett’s interest in Burlington is primarily limited to the Lee’s Carpet business, which could be a strategic fit with Shaw Industries, the leading rug maker that Berkshire Hathaway acquired in 2001.

“Don’t read any broad trends about the textile industry into this,” said the source, who asked not to be identified. “This looks like it’s about carpet and the question is what will come along for the ride, if anything.”

For the last two fiscal years, Lee’s Carpet has been Burlington’s only profitable unit.

In the fiscal year ended Sept. 28, the carpet division recorded pretax profits of $36.8 million at a time when the apparel fabrics business was $14 million in the red. Its sales were $262.5 million, representing 26 percent of Burlington’s $1.01 billion in revenues.

Burlington’s other divisions have contracted dramatically over the past two years — its $484.6 million in apparel-fabrics sales were off 41.6 percent from their 2000 level — the result of a move out of unprofitable operations and product segments. The carpet business has also contracted, but not so dramatically — its sales were off 11.3 percent over the same period.

Others viewed the move as a more straightforward one.

“This event provides tremendous validation for George Henderson’s strategy at Burlington,” said consultant Nick Hahn of Hahn International, based in Stamford, Conn. “What his strategy has essentially been has been to move out of manufacturing businesses in the U.S.”

In addition to company-owned mills in Mexico and a joint venture in India, Burlington has organized its apparel-fabrics businesses into a new division, Burlington Worldwide, based in Hong Kong. That division has begun to sell fabrics made by independently owned mills in Asia, but offering Burlington’s brand name and technology standards.

It’s essentially a contracting business model, the same approach that apparel and footwear companies, including Liz Claiborne and Nike, have taken to their manufacturing operations for years.

Several major bankruptcies and extended waves of plant closings have radically changed the face of the U.S. textile industry over the past decade. Hahn contended that some of the surviving companies have developed strategies that are logically sound and that their major weakness is a lack of access to new investment to execute their ideas.

In some U.S. mills, he said, the ideas are in place. “What is lacking is the financial strength,” Hahn said.

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