Goverment May Bail Out and Be Responsible For Deeds Of Federal Mogul and Other Asbestos Litigants

NEW YORK May 31, 2003; Arindam Nag writing for Reuters reported today that asbestos is still a dirty word for Corporate America, but a bill now before U.S. Congress could open the door to a string of new deals among companies once under a cloud of litigation uncertainty, Wall Street deal makers said.

The bill, introduced last week by Republican Senator Orrin Hatch, aims to set up a $108 billion fund to compensate victims of exposure asbestos, which was widely used for fireproofing and insulation until the 1970s when scientists concluded that inhaled fibers could be linked to cancer and other diseases.

If approved, the bill would help companies involved in asbestos litigation to identify with a greater degree of accuracy the extent of liabilities they face from claimants. It would also arm them with enough guidance to craft a mutually acceptable payment pattern.

"If the legislation passes, then there is no question that the certainty that comes with it will create a completely new set of circumstances where companies with asbetos liabilities will be in play," said Mark Goodman of New York law firm Debevoise & Plimpton.

While some bankers and lawyers remain cautious about the ultimate outcome, the response of the stock market to the asbestos bill has so far been of positive anticipation.

In the last two months, shares in bankrupt auto parts company Federal-Mogul Corp. (OTC BB:FDMLQ.OB - News) have jumped from 10 cents to 44 cents. Building materials maker Owens Corning (OTC BB:OWENQ.OB - News) jumped from 5 cents to a high of over a dollar and currently is trading at 75 cents, and shares in USG Corp have trebled to trade over $11.00.

Senator Hatch, who called for a resolution to the crisis "within the next month," said over 8,400 companies have been named as defendants in asbestos lawsuits filed across the United States, while 60 have gone bankrupt. Unless the problem is resolved, he warned, many more companies may be headed for bankruptcy.

The asbestos complaints are found in industries such as auto parts, building materials, vehicle makers and chemicals. Corporate transactions in some of these sectors have slowed down as potential buyers have failed to figure out what value they should put on the liabilities.

"From an M&A standpoint, there are some companies that would not touch any situation that has an asbestos issue," said an industrials banker with a top Wall Street firm.

The current bankruptcy laws allow the creation of a trust that can own over 50 percent in a bankrupt company and ensure that patients suffering from asbestos-related diseases get a reasonable settlement.

But the current laws do not prevent new cases from popping up, making it difficult for companies to estimate their true liabilities and subsequently a fair value of their businesses.

This has also forced potential buyers to drop out of deals to buy some of the businesses.

One of the best examples is Cooper Industries' failed attempt to buy Danaher Corp. in 2001 because Danaher could not accurately estimate Cooper's asbestos exposure. Wall Street's deal makers say there have been several instances of deals dying without getting publicized.

"There are many examples of both strategic and financial buyers looking hungrily at potential acquisitions, but deciding at the end of the day that the asbestos liability presents too significant a risk to be overlooked," said Goodman.

Hatch's proposal would create a national trust fund to cap company liability and compensate victims over the next 25 years via an asbestos claims court. The top payment would be $750,000 for victims of mesothelioma, a lethal form of cancer.

This would provide the trustees a finite set of numbers when they calculate overall liabilities, bankers say.

"That makes it easier for them to look at a potential price tag that someone puts on them," a banker specializing in automotive industries said.

Experts following some of the asbestos-hit companies say that some bankrupt companies have been able to maintain high brand equity for their products and also have talented managers, making them good acquisition targets.

Federal-Mogul, Owens Corning and USG are considered good targets for potential buyers, both strategic and private equity firms who have so far stayed away from any business with the slightest asbestos exposure.

Cooper, which is not in bankruptcy but has some exposure to asbestos litigation, could return to the auction block if the bill is passed, bankers say.

Mark Pytosh, head of industrials investment banking for Lehman Brothers, says that the Hatch bill would enable some of these companies not just to come out with stronger balance sheets, but would be able to regain their regular stock market listing, also making them good takeover targets.

"You will have a framework where the sums can be established, and you can start to move some of these companies to a different position from where they have been for quite a while," said Pytosh.