W.R. Grace Stock Soars on Hope of Favourable Asbestos Deal 06 May 2002, ICB Americas with Ted Weschler
Complex and arduous, the corporate bankruptcy process is often misunderstood. While the majority of corporate bankruptcies result in stockholders getting the big zero, in certain cases equity value can be retained. In recent weeks, shares of bankrupt specialty chemicals company W.R. Grace & Co. have rallied sharply on potential shifts in asbestos litigation trends and the potential for government intervention.
W.R. Grace & Co. filed for Chapter 11 bankruptcy protection in April 2001 in the US bankruptcy court for the district of Delaware on mounting asbestos litigation. As a result, just about every Wall Street equity analyst dropped coverage of the stock. However, there has been renewed interest lately. After hitting a low of $1.31 in October 2001, shares of W.R. Grace tripled to a recent high of $3.99 before retreating a bit to around $3.35.
Now Grace’s largest shareholder, Charlottesville, Va.-based Peninsula Partners LP scooped up large quantities of Grace shares on the cheap last year. The investor now owns over 10.5 million shares of Grace, or 16 percent of the outstanding shares, at an average price of $2.54.
The investor believes there will be considerable residual value in Grace’s common stock after the company emerges from bankruptcy. “It’s not unprecedented,” says Ted Weschler, managing partner of Peninsula Capital Advisors LLC, an affiliate of Peninsula Partners. “The Grace situation is more analogous to the situation with Texaco years ago and Columbia Gas Systems. Both companies went into bankruptcy because of special circumstances-not because of a bad business model.”
Ted Weschler estimates that Grace’s shares could be worth nearly four times the current stock price. He first looks at what the shares would be worth without the asbestos taint. “It’s a great core specialty chemicals operation, relatively non-cyclical and led by a great management team,” he says. “Last year they had earnings per share of $1.20. If you put a long-term market multiple on $1.20, which Grace would certainly have without the asbestos taint, that’s a $24 stock.”
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