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Factions agree on deal for Walter

Fighting factions of Walter Industries Inc. creditors and shareholders reached a crucial settlement Thursday that is expected to mark the end of the largest and most unwieldy bankruptcy case in Tampa's history.

A few final issues are expected to be hammered out before a new hearing, scheduled for Nov. 9. At least until then, terms of the deal are sealed by court order.

Walter Industries is a Fortune 500 home building, industrial and mining conglomerate based in Tampa. It employs 7,800 people, including 400 in Tampa.

For the past five years, Walter has been reorganizing its finances under protection of Chapter 11 bankruptcy. Celotex Corp., a former subsidiary, also is undergoing reorganization.

Hanging over the company were lawsuits from people claiming harm from asbestos exposure. The suits tried to "pierce the corporate veil" between Celotex, which at one time made asbestos, and its former parent.

In April, Chief Bankruptcy Judge Alexander Paskay ruled the veil couldn't be pierced, limiting the asbestos claims to Celotex's much smaller assets. The claimants later lost an appeal in district court but vowed to pursue it in appellate court.

On another front, a battle was brewing over control of Walter.

Its 92 percent shareholder, Kohlberg Kravis Roberts & Co., and its largest bondholders, Apollo Advisors and Lehman Bros., clashed over two issues: whether to settle with asbestos plaintiffs for $450-million, and how much each are due from Walter's cash, stock and new debt. Bondholders wanted interest accrued since the bankruptcy filing.

The conflict focused the spotlight on two erstwhile friends turned enemies: KKR chief Henry Kravis and Apollo's founder, Leon Black. Black had advised Kravis on some of his buyouts, including Walter's in 1988.

The hearings this week were supposed to air these issues and help Judge Paskay decide if a reorganization plan drafted by Apollo and backed by creditors could be approved.

But on Wednesday Paskay abruptly recessed and instructed the two sides to negotiate a settlement.

Kevin McCabe at BDS Securities Corp. said Paskay left hints that he would side with creditors on how much bondholders were owed, but the judge sided with shareholders and KKR, which said the proposed asbestos settlement was unfair.

That would doom the reorganization, forcing the court to start over or to liquidate Walter and its subsidiaries to pay creditors.

Round-the-clock negotiations ensued. Slightly after 3:30 p.m. Thursday, a parade of lawyers and agency principals, including Kravis, presented a proposed agreement to Paskay in his chambers.

"Judge Paskay telegraphed enough signals to force all the parties to agree quickly," said McCabe, whose firm trades Walter bonds but was not party to the negotiations.

"When Paskay was able to convince KKR that the bondholders were going to get post-petition interest, that starts the meter running," on the bankruptcy's cost to KKR, McCabe said. "On the other hand, the creditors were told there was no way the (asbestos) settlement was going to be approved."

That weakened the asbestos attorneys' bargaining position, probably forcing them to agree to a smaller settlement, McCabe said. He speculated that the asbestos plaintiffs agreed to give up $150-million to $200-million to KKR. (KKR's original investment was $150-million.)

McCabe also predicted that KKR would lose majority control over Walter.

Nevertheless, it seemed clear Kravis didn't walk away empty-handed. He had been tense and quiet through most of the proceedings, but after the settlement, he smiled broadly and shook hands with adversaries.

"The Walter Industries Chapter 11 case has involved lengthy and difficult negotiations among many different parties with conflicting interests," Kravis said in a press release. "Final achievement of a fully consensual resolution was made possible only through the constructive efforts of all creditor representatives . . ."