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September 09, 2002 02:00 AM

Asbestos-beset Cryovac could return to Grace

Joseph Pryweller
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    According to a prominent investment firm, Sealed Air Corp. could lose its large Cryovac specialty films division to W.R. Grace & Co. in an asbestos-related court battle.

    Sealed Air is to go to court Sept. 30 in Wilmington, Del., in a multibillion-dollar case over asbestos claims filed against Cryovac's former owner, W.R. Grace of Columbia, Md.

    Credit Suisse First Boston, in a Sept. 4 report, said it is a ``reasonable outcome'' to expect a worst-case scenario. If Sealed Air loses the case, the Cryovac deal could be ``unwound'' and the company returned to financially struggling Grace, which filed in 2001 for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

    If that happens, Grace may have to return the original purchase price of $1.2 billion to Sealed Air. Such action significantly could boost Sealed Air's deflated stock price, according to the report.

    However, according to the report, Sealed Air could decide to settle the case and keep Cryovac, but it may have to pay asbestos plaintiffs as much as $3.7 billion, which would be a tremendous blow to Saddle Brook, N.J.-based Sealed Air.

    The report concludes that moving Cryovac assets back to Grace could benefit Sealed Air and would not be that difficult, since the Cryovac and Sealed Air facilities have remained distinct. ``In speaking with [Sealed Air], we do not believe that the unwinding would be that difficult,'' the report states.

    While Credit Suisse officials did not respond to several telephone calls seeking comment, a lawyer for the plaintiffs said that returning Cryovac to Grace is not out of the question. However, it is too soon to consider that option, said Elihu Inselbuch, a New York lawyer arguing the personal-injury portion of the suit.

    ``It isn't that simple a question to answer,'' Inselbuch said. ``I don't know whether Cryovac can be returned, or whether it has been maintained in isolation [from Sealed Air]. We'd be getting ahead of ourselves to consider forms of relief before the trial. Let me win the case, then we'll consider all that.''

    But Inselbuch also said the law suggests that the Grace litigants should receive the best possible outcome. If the Cryovac assets are worth more now than when they were sold by Grace, that current value should be considered, Inselbuch said. ``It's just our responsibility to make the debtor's estate whole,'' he said.

    Other analysts and investors were more concerned about the lasting effects the trial could have on Sealed Air.

    ``All that stuff is pretty much theoretical and up to the courts to decide,'' said equity analyst Ghansham Panjabi of Lehman Bros. in New York. ``But if the ruling is unfavorable to Sealed Air, the money would have to come from balance-sheet reserves, and that flows directly to the income statement. That would really whack the stock and hurt a franchise that's been great in almost every single other respect.''

    Panjabi said that a spinoff of Cryovac, possibly to a trust run by the asbestos creditors, is a possible scenario.

    ``Hopefully, the judge won't go for blood, and this won't have to happen,'' he said.

    But a larger problem might be Cryovac's inability to appeal a ruling from a potentially unfriendly judge, said Robert Chapman, general partner of hedge fund Chapman Capital LLC of El Segundo, Calif., and an investor in Sealed Air.

    Posting a bond to appeal could cost Sealed Air $4 billion to $5 billion, he said.

    ``It could be difficult to come up with that,'' he said. ``They might have to settle.''

    Inselbuch said that multibillion-dollar appeal figure is likely. ``It will be a big issue if we prevail,'' he said.

    Yet in the midst of the murky, looming court battle, Sealed Air has not put expansion on hold. The company plans to have a new, 20,000-square foot, medical-films plant running by the end of 2003.

    While Sealed Air officials were unavailable for comment, Cryovac officials in Duncan, S.C., said its ongoing business is a separate issue from asbestos litigation.

    ``And we're doing just fine there,'' said Stephen Schultz, general manager of the Duncan-based medical products division. ``We continue to invest to support customer demands and growth in new markets.''

    The asbestos suit, in U.S. District Court in Wilmington, Del., alleges that Grace fraudulently sold Cryovac to get out from under a still-rising pile of asbestos claims. A judge's preliminary ruling in July concurred that the deal could be questioned if Grace was insolvent at the time of the sale.

    That ruling stunned analysts, who immediately saw Sealed Air's stock price fall by more than 60 percent, and led to an angry response by Sealed Air President and Chief Executive Officer William Hickey. ``We do not believe the solution is to bring financial ruin to shareholders, employees and the company, whose only option was to buy in good faith,'' Hickey said in an Aug. 1 conference call.

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