Dan River Inc.'s eight-month struggle to stave off an unfriendly tender offer by New York investor Carl Icahn should reach a climax tomorrow at the company's annual meeting here.
The management has asked Dan River shareholders to sell their stock to the company for $22.50 each, converting the public company into a private one.
According to the prospectus, the textile firm would become a subsidiary of a newly formed holding company. The company will be owned by Dan River employes and management under an employe stock ownership plan (ESOP).
The prospectus makes it clear that while the 12,000 employes of Dan River will get stock and job security, the proposed plan immediately benefits the 26 members of management who will get control of the company and rid of Icahn.
"My guess is, if Dan River succeeds in using the ESOP as a defense strategy, we're going to see quite a few more of these," says Cory Rosen, executive director of the National Center for Employee Ownership in Arlington.
Icahn, who owns 22 percent of the outstanding voting stock, is not expected to vote his shares because of various legal restrictions. He refused comment on his plans.
By law, the ESOP must be approved by 85 percent of the remaining shareholders, but management is confident that the plan will be voted through.
The unique ESOP strategy was created by management with the help of a phalanx of financial and legal advisers, including Kelso Investment Associates. Louis Kelso, the founder, created ESOPs and was instrumental in getting Congress to approve special tax considerations for them in 1974.
Icahn, who gained his reputation in boardroom battles with Marshall Field & Co. and Hammermill Paper Co., among others, is by far Dan River's biggest stockholder. In a tactic that he has made famous, Icahn has threatened to merge Dan River into his own company or to seek another buyer. The nervous Dan River management has launched a variety of unsuccessful and costly defense strategies, including a number of court challenges.
The ESOP however, seems to offer something for everyone.
Icahn, who paid an average of about $16 a share for his stock, will earn about $7 million before expenses, if the plan is approved.
The plan should also appeal to the long-suffering Dan River stockholders who have seen their stock price languish for more than a decade at below $10--the price of the New York exchange traded stock when Icahn first announced his plans last September.
For Dan River employes--and the citizens of this small company town--the ESOP is a measure of security after months of uncertainty. The employes also will get stock, at no expense to themselves, which may be worth some money in the years ahead if Dan River improves its earnings.
But it is clear from the prospectus that the biggest financial winners under the ESOP strategy are the managers and directors of Dan River.
Their stock holdings in the company total less than 3 percent. But under the plan, the officers and directors will get 25 percent of the new holding company's stock, and will be virtually immune from another Icahn-like challenge.
As the prospectus states, "another effect of the merger will be to place the directors of the holding company in a position to control Dan River for an indefinite period of time." Dan River Chairman David W. Johnston Jr. explains management's large equity position this way: "To raise the money, there had to be an equity participation. The banks would not lend money unless the existing management was tied to the business."
The holding company will issue two classes of stock. Dan River employes will get Class A stock, valued at $22.50 a share, depending on their annual salaries and years of service with the company. The stock will give them a 70 percent interest in the holding company, but will cost them nothing. It will be financed by loans from the holding company.
The 26 members of the management group will pay $2.06 a share for Class B stock, giving them a 25 percent interest.
Kelso Associates will acquire a combination of class A and B stock, giving them a 5 percent interest, and also get a a $900,000 fee plus expenses from the holding company.
While the employes will own a bigger percentage of the holding company, they will have no say in its day-to-day management. The employes' ESOP shares will be voted by an ESOP committee, "the majority of which will consist of holding company directors," according to the prospectus.
The individual ESOP holders can vote their stock only in the event that management proposes to sell "all or a substantial portion of the holding company's assets or to merge or voluntarily liquidate Holding Company," the prospectus reads. The management group has no vote on these issues.
The prospectus also states that the "transactions have been structured . . . to take advantage of favorable provisions of applicable tax laws."
Chemical Bank of New York which works closely with the Kelso firm, will lend $153.9 million to the holding company, $49 million of which will be repaid by Dec. 30, 1983. The balance is scheduled to be paid back over five years or longer. Under the law, an ESOP is a tax-exempt trust, so the holding company owes no taxes on earnings used to pay off interest and principal of the loan. Thus, Dan River can operate free of taxes for the next five years. Another advantage for the new company is that recently the 101-year-old textile firm has gone through a massive modernization program. Six old, unprofitable plants were closed, and $157.5 million spent on modernization, according to chairman Johnston.
He says that these changes plus the "depression" in the textile industry caused his company in 1982 to lose $8.7 million on sales of $519 million.