This Stub Comes With A Suit

West Point-Pepperell, a leading manufacturer of bed linens and towels, was taken private in a leveraged buyout three years ago at a price of $58 a share. But as so frequently happened to '80s-vintage LBOs, things didn't work out quite as planned. In June, parent West Point Acquisition Corp. threw in the towel, filing for a prepackaged Chapter 11 reorganization. The 5% of shares that weren't purchased in the LBO are trading at $38 apiece.

Is the "stub" a buy? You bet your life, says James Rubin, a general partner of M.D. Sass Re/Enterprise Partners, which has bought into the stub. Rubin believes that West Point-Pepperell's 1.5 million stub shares are undervalued. The company, he feels, is really worth $43 to $44 a share. But shareholders have the benefit of another possible "asset," although management probably doesn't view it as such. A group of stub investors led by Kidder Peabody are suing. They claim, among other things, that it's high time the rest of the shares were bought. (The defendants deny the suit's allegations.) Rubin is wagering that the suit stands a decent chance of resulting in a settlement based on the $58 offering price plus interest. "They should settle for, maybe, $65 or so a share," notes Rubin, who believes that current shareholders would share in the proceeds. Is he right? Well, securities litigation is one growth industry that hasn't been hurt by the recession. And the West Point stub is as close as you can come to a "lawsuit pure play."

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