GE Capital vs. the Small-Town Folk Hero
By GRETCHEN MORGENSON
Published: October 24, 2004
NYTimes Financial Section
ARON M. FEUERSTEIN, the inventor of Polartec fleece, became a certifiable corporate folk hero by paying workers out of his own pocket after his family-owned Malden Mills factory burned to the ground in 1995. Six years later, however, he lost control of the company when it declared bankruptcy, a victim of excessive debt it took on to recover from the fire.
Now Mr. Feuerstein, 78, wants to buy back his company from its current owners. A storybook ending, right? Not quite. His offer, which would keep 1,000 jobs in the Merrimac Valley of northeastern Massachusetts and provide low-cost housing to area residents, has been rejected by the board of Malden Mills and its largest shareholder, GE Capital, the giant financing arm of General Electric.
Their refusal to sell is puzzling - not only to Mr. Feuerstein but also to bankers, politicians and others familiar with the circumstances surrounding the textile plant and its recent wistful history.
GE Capital, Malden Mills' main creditor, became its largest shareholder as a result of the bankruptcy filing. GE Capital's representative is the chairman of the Malden Mills board. Together, the company's senior lenders own 79 percent of the company; GE Capital alone has 16.6 percent.
In 2001, Malden Mills hired Kroll Zolfo Cooper, a consulting firm that specializes in corporate restructurings and turnarounds, to take it out of bankruptcy. It emerged from Chapter 11 a year ago. (Mr. Feuerstein remained the chairman while it was being restructured.)
Typically, turnaround specialists like those at Kroll Zolfo Cooper, which is also handling asset sales at Enron, are looking for a quick sale. That is why the rejection of Mr. Feuerstein's bid - which includes a loan guarantee commitment from the Export-Import Bank of up to $35 million, $17.5 million in cash and equity from a property developer in Boston and financing from a major global bank - is so peculiar.
"I was so terribly disappointed that the board just turned this thing down without any discussion whatsoever with me,'' Mr. Feuerstein said. "Not only because I had worked especially hard and we put together a debt and equity purchase, which I can't imagine anyone else in the world being able to match, but the purpose of it is to meet the mission of the company, which is part of my family, to secure and grow the jobs at Lawrence, Mass., and Hudson, N.H.''
Mr. Feuerstein, whose grandfather founded Malden Mills in 1906, has an option to buy back the company that has two years to run. The option was granted when the company exited bankruptcy, and its price tag has risen over time. For instance, during the period that will end on Nov. 1, the price to buy Malden Mills is roughly $120 million, including debt to be assumed.
Although Mr. Feuerstein declined to disclose all the terms of the offer, his son, Daniel Feuerstein, said it was less than the option price but nonetheless fair. "The proposal was based on a multiple of the company's earnings before interest, taxes, depreciation and amortization that we believe was better than market value and based on objective business standards,'' the younger Mr. Feuerstein said. He added that the proposal was "well within the range" inherent in the option granted to the elder Mr. Feuerstein.
A spokesman for Malden Mills said that no one at the company would discuss Mr. Feuerstein's offer or why it had been turned down.
Adding to the mystery of the rejected bid is the fact that Malden Mills has not performed well under the turnaround team. In the fiscal year that ended in October 2003, for example, the company generated earnings before interest, taxes, depreciation and amortization of $13.7 million. That is well below the $20 million that the team had projected for 2003, according to documents filed with the bankruptcy trustee.
Malden Mills has languished under Kroll Zolfo Cooper but has also been a boon for it. By 2003, it had received $5.9 million for its work, according to public filings. Last March, the judge overseeing the case in Federal Bankruptcy Court in Worcester, Mass., chastised Kroll Zolfo Cooper for failing to provide meaningful details in its fee applications to the court. As a result, the court reduced the firm's request for fees by $250,000.
Because Malden Mills is no longer operating in bankruptcy, its results for 2004 are not publicly available. Its internal earnings projections were $22.7 million for the period.
It is a good guess that those projections have not been met, given that on Oct. 7, Malden Mills announced that it was shutting its manufacturing plant in Gorlitz, Germany. The plant, built in 1994, had been extremely profitable, according to a former executive, producing high-quality fleece for European markets.
Michael Spillane, the former president for children's clothing and men's underwear and loungewear at Tommy Hilfiger, joined Malden Mills as chief executive in July. David Orlofsky, an executive at Kroll Zolfo Cooper, remains the company's chief financial officer.
MR. FEUERSTEIN said his offer for the company would keep all of its jobs in Massachusetts and New Hampshire, but Mr. Orlofsky does not appear to have the same commitment. In a letter he wrote in August 2003 to the Export-Import Bank of the United States, he said the current owners would probably move "a substantial part of Malden's operations overseas over the next several years.'' The company has contracted with a plant in Asia to make fleece products.
The loss of jobs at the plant in Lawrence would injure an already depressed region. "Obviously, my primary interest is in the jobs that are in the Merrimac Valley,'' said Representative Martin T. Meehan, a Democrat whose district includes the plant. "And that's one of the reasons why I and other members of the Congressional delegation have been supportive of Aaron and his attempts to secure the loan guarantee from the Ex-Im bank.''
Bankers say that when financial institutions wind up in distressed situations like this one, they are usually eager to sell and move on. So it seems odd that GE Capital will not do so. After all, the money it might lose in such a sale would not even be a rounding error in its enormous business. In the third quarter, GE Capital reported revenue of $17.5 billion.
"I think whoever runs the company has to believe in the values that the company has," said Cesar F. Aguilar, Malden Mills' former executive vice president for sales and marketing, "as it relates to its brand, innovation, current customer base and the responsibility to the community and the country.
"Every company has a DNA," he added. "But when you mess with the DNA, it's not the same.''