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The eBearing News
January 20, 2004

Federal-Mogul and Honeywell End
Bendix Acquisition Talks
copyright © 2004 eBearing Inc.

Federal-Mogul Corporation (USA) and Honeywell International Inc. (USA) have abandoned F-M's highly controversial proposed acquisition of Honeywell's Bendix brake parts division. Neither company would comment directly on the reasons behind the deal's collapse, two months after the final drop-dead date.

With its auto parts businesses in trouble and overwhelmed by asbestos liability claims, Federal-Mogul filed for Chapter 11 bankruptcy protection in October 2001. After a number of aborted reorganization plans, the company now says it expects to exit Chapter 11 in mid-2004.

Key among the provisions for exiting bankruptcy is the ownership. Exiting bankruptcy, 50.1% of the company's equity will be held by a trust to benefit asbestos claimants, while 49.9% will be held by secured creditors.

Announced in January 2003, the Bendix deal originally had a November 15, 2003 drop-dead date. In mid-December 2003, Honeywell's CEO said the deal was still very much alive and that the companies hoped to have it completed shortly.

•article: Federal-Mogul creditor agreement, will acquire Bendix

In bankruptcy, F-M has been advised by an arm of Rothschild Inc., a U.S. investment bank famous for its "aggressive interpretation" of bankruptcy law.

Termed "breathtaking in its audacity" by some and "inspired" by others, the proposal was that F-M would acquire Bendix from Honeywell for free, taking the business and its associated asbestos liability insurance. Honeywell would finally be rid of Bendix, a division it had long tried to divest, and Federal-Mogul would gain another related product line to bolster its post-bankruptcy business operations.

"We started looking for companies that could contribute to the reorganized Federal-Mogul within the context of the deal," Rothschild Managing Director Todd Snyder told CFO magazine in mid-2003. "We came to the conclusion that what we had to offer other asbestos defendants that they potentially lacked was the Section 524(g) release." Because of Federal-Mogul's already-high asbestos liabilities, adding more didn't "alter the calculus of the deal all that much," he said.

Section 524(g) of the bankruptcy code has been used to shield parents from the liability of the debtor during the debtor's Chapter 11 reorganization litigation.

F-M and Rothschild found their answer in Bendix. Honeywell's efforts to sell off Bendix had been thwarted by its unknowably huge burden of asbestos liabilities -- Bendix reportedly faces at least 71,000 asbestos claims, potentially totaling over USD $2 billion. In 2003 alone, Honeywell paid out $580 million for Bendix claims. Yet the Bendix product lines would fit well into Federal-Mogul's post-bankruptcy business plans, and Bendix had recently proved it could still operate profitably.

If Honeywell could divest Bendix, its asbestos liabilities and related insurance to Federal-Mogul, F-M and Bendix asbestos claims would be pooled. Exiting bankruptcy, all of the asbestos liabilities would be stripped away into Federal-Mogul's asbestos payout trust.

Earlier, Honeywell attempted to have F-M's bankruptcy court include Bendix Division asbestos suits but was rejected, leading the two companies to the business-for-liabilities transaction.

The scheme, however, raised red flags almost immediately, coming under ever-increasing scrutiny and complaint as time went by. Neither Federal-Mogul nor Honeywell commented directly on the reasons behind the deal's collapse.

The Big Three automakers -- General Motors, Ford and DaimlerChrysler -- filed suit to stop the transfer, claiming it would be a "fraudulent transfer" of Bendix assets from Honeywell to Federal-Mogul, a move they claim was designed solely to bury Bendix asbestos claims in Federal-Mogul's bankruptcy.

Ford, GM and DC are co-defendants in many of the asbestos claims filed against Bendix; the transaction would leave them as the only solvent targets for many claims. The Big Three said in a statement, "Bankruptcy protection cannot be bought and sold. Federal-Mogul's and Honeywell's unprecedented attempt to do so would violate federal and state law, be unfair to thousands of asbestos claimants and inappropriately shift litigation costs to the automakers."

•article: Big Three automakers sue to stop Bendix transfer

Similarly, other plaintiff attorneys and even unrelated asbestos defendants objected to the court on the grounds such deals shortchange victims, while unfairly shifting asbestos liabilities and payouts to the companies who have not yet sought bankruptcy protection against more claims.

Bendix claimants also objected to being rolled into the Federal-Mogul trust because, historically, such trusts have compensated claimants poorly. One example given is the Manville Trust, set up in 1988 to pay asbestos claims of Johns-Manville; in 2001, it changed its payout from 10% of involved claims to only 5%, in order to preserve dwindling assets. Other trusts have faced the same fate.

For its part, Federal-Mogul is said to have been put off by an internal analysis, indicating Bendix could never become valuable enough, even if acquired for free, to offset the asbestos liabilities it brings. The analysis comes even as Bendix reportedly turned in a surprise profit for Honeywell and expects to be profitable again in 2004.

Honeywell now says it intends to operate Bendix as a going concern. With asbestos brake materials banned in the U.S. effective December 31, 2003, Honeywell said, "Our efforts with the automotive friction materials business are now focusing squarely on growth, serving the needs of our worldwide customers and continuing our long history as a global leader in friction materials."

Separately, the U.S. Court of Appeals for the Third Circuit is urging Judge Alfred Wolin, overseeing Federal-Mogul and four other asbestos-related Chapter 11 bankruptcy cases, to step down.

Creditors argued to the Appeals Court that Judge Wolin, a Newark-based Federal District Court Judge, has held far too many private discussions with the parties in the case. And that, of the five outside asbestos experts brought in by the judge, two are reportedly asbestos victim advocates in another bankruptcy case.

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- by Bruce A. Carr
from individual research,
tips and commercial sources.
Bruce Carr edited this content.
Copyrighted material; unauthorized reproduction prohibited.

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