A July 29 legal opinion regarding asbestos claims cast a chill over the future of Sealed Air Corp.'s prized Cryovac food-packaging division.
The decision also could cast a long shadow over future deals at other companies, especially those in bankruptcy or with legal obligations, according to some business experts.
``This type of ruling could have tremendous ramifications on companies being willing to undertake acquisitions,'' said Paul Vastola, associate director of corporate ratings service Standard & Poor's in New York. ``Companies have suffered from an increase in litigation the last few years that I don't believe was expected by any of them.''
U.S. District Judge Alfred Wolin's ruling set standards for an upcoming trial over asbestos claims involving Sealed Air's 1998 purchase of Cryovac, a specialty packaging company with a large film presence.
Cryovac's previous owner, W.R. Grace & Co. of Columbia, Md., had been buried with thousands of asbestos claims stemming from other products. When it filed for Chapter 11 reorganization in April 2001, the specialty chemicals company had received more than 325,000 asbestos personal injury claims and paid out $1.9 billion in litigation.
This year, a committee representing a mix of Grace's creditors and asbestos claimants filed a lawsuit in April alleging that Grace fraudulently sold Cryovac to get out from under a mountain of future asbestos claims.
The $5 billion sale price only included $1.2 billion in cash, not nearly enough to offset future damages to asbestos victims, said Brad Friedman, a New York lawyer representing the plaintiffs.
``Nobody really knows the number of claims,'' Friedman said. ``There's hundreds of thousands of personal-injury victims and government entities that own buildings [with asbestos]. How many people are going to develop mesothelioma or another asbestos-related disease?''
Friedman argues that Sealed Air should have paid much more in cash, and also that Grace already was insolvent at the time of the sale. Ultimately, Friedman said he would like Cryovac assets turned over to the debtor's estate - or, at the least, a cash settlement made to compensate future victims.
The case is set for a Sept. 30 trial in Wilmington, Del.
Wolin's opinion agreed with many of Friedman's points. ``That W.R. Grace's asbestos may already have injured so many people as to make the company insolvent on the transaction date is hardly an intuitively surprising proposition,'' he wrote.
Sealed Air officials were stunned by the news, and the stock dropped from $37.77 prior to the disclosure July 29 to $14.51 on July 30. Shares closed Aug. 1 at $17.25. Several equity firms, including Salomon Smith Barney and Credit Suisse First Boston, lowered their recommendation on Sealed Air's stock from ``buy'' to ``neutral.''
Uncertainty surrounding Cryovac's future put Wall Street into a state of flight, said Ghansham Panjabi, an equity analyst with New York-based Lehman Bros.
``No one knows how much of an estimated potential liability Sealed Air will have,'' Panjabi said. ``It could be infinite; that's why the stock was walloped.''
Investor anxiety over the possibility of another company in trouble might have fueled a market overreaction, Vastola said.
``Investors were thinking another Enron was on the way. They were not even waiting to learn all the facts, but wanted to quickly get away from the situation,'' he said.
William Hickey, Sealed Air president and chief executive officer, held a stormy analyst conference call Aug. 1. He shared his sympathy with victims of asbestos but said his company, a buyer of a unit unrelated to those claims, should not be held responsible.
``I recognize asbestos as a societal scourge,'' Hickey said. ``But I do not believe the solution is to bring financial ruin to shareholders, employees and the company whose only option [when purchasing Cryovac] was to buy in good faith.''
Hickey said Sealed Air conducted due diligence and paid what it believed was a fair price.
``I have concerns that the ruling may open every bankruptcy to fraudulent-transfer allegations,'' Hickey said. ``Companies shouldn't have to worry that, years later, a deal is challenged or undone in light of subsequent events. That should not be the correct view of the law.''
Hickey's statements gained a mixed reaction from some Wall Street analysts. Gary Schneider of Bear Stearns in New York said nobody expects Sealed Air to lose the case or to face penalties that could destroy the company. But the situation has opened up a degree of doubt about Sealed Air.
``My thinking is that you're dealing with something here that is actually unprecedented and that could lead to a half-dozen different remedies,'' Schneider said. ``Obviously, it takes some luster off Sealed Air.''
Panjabi said Sealed Air was having a good year prior to the ruling.
``It hit them like a ton of bricks,'' he said. ``Now, they have to prove they didn't pay a sham price for Cryovac.''
While Sealed Air asked Aug. 1 for a pretrial appeal, that rarely is granted, Friedman said. He expects the trial to last no longer than two weeks.
``From a practical matter, they should get smart and settle it themselves before trial,'' Friedman said.
``The market has taken the judge's decision seriously, and so should Sealed Air.''