ABB agrees bankruptcy deal with asbestos lawyers

The struggling Swiss-Swedish industrial engineering group, ABB, has reached agreement on a bankruptcy plan for its asbestos-hit US subsidiary, Combustion Engineering.

The deal would cost the company a maximum of $1.2 billion.

The debt-laden group, based in Zurich, is now offering cash of up to $350 million, as well as $50 million in ABB stock.

It had originally put $1.1 billion on the table for a settlement, made up of $300 million in cash as well as the assets of Combustion Engineering.

In a statement on Friday, ABB said the deal was struck with lawyers who are likely to represent the bulk of claimants.

The agreement is expected to remove a cloud of doubt over the group’s future. The financial consequences of the asbestos issue had prompted ratings agency Standard and Poor’s to cut the group’s bond rating to junk.

Merrill Lynch said the news was a good outcome for ABB, and that it expected the stock to respond positively. However, the investment bank said it would retain its “sell” rating on ABB stock “on the basis of the underlying valuation”.

The news saw ABB’s share price rise by 4.4 per cent, closing at SFr4.72 up from SFr4.52 the previous day.

The company described the agreement as a “significant milestone”. It said asbestos claimants would be voting on the deal next week, and that if a sufficient number approved it, Combustion Engineering would be put into Chapter 11 bankruptcy under those terms.

“ABB was aiming at such an agreement. It’s certainly positive that representatives of the claimants agreed,” analyst Chris Burger at Bank Vontobel in Zurich told swissinfo.

“But for a conclusion of the asbestos issue, the pre-package Chapter 11 has to be approved by 75 per cent of the (111,000) claimants, 66.7 per cent of the amount of claims and also by the bankruptcy court,” he added.

Chapter 11

In a statement on Friday, ABB said that a trust is to be set up under the plan, which will handle claims after the Chapter 11 reorganisation has been approved in court.

Under the terms of the accord, the value of Combustion Engineering on the due date would be made available for the payment of asbestos claims. The value of the unit was $812 million at the end of September.

ABB added that from the new cash offer of $350 million, $100 million was dependent on its financial performance. Payments are to be made between 2004 and 2009.

The group, which is in the midst of an overhaul to concentrate on power and automation technology, said it was “on schedule” to file a bankruptcy case for Combustion Engineering before the end of February.

Threat of bankruptcy

Analysts had expected that ABB’s original offer would have to be raised to $1.5 – $2 billion and there were fears that asbestos liabilities of tens of billions of dollars would involve the parent company going bust itself.

Asked whether ABB was now out of the woods, analyst Burger at Vontobel was cautious.

“If the deal comes through, yes. If the asbestos issue is over they can concentrate on their core business but they still have a lot of problems,” he commented.

“They want to sell different businesses and they need new financing. The agreement has a positive impact on the share but that’s a one-time effect and we have a neutral rating,” he added.

The company last year hit the negative headlines after announcing a record loss of $691 million dollars for 2001 and being involved in a dispute with two of its former Swedish chief executives, Percy Barnevik and Göran Lindahl, over what were considered exaggerated retirement benefits.

The group announced a drastic restructuring and cost savings programme in November when it cut its earnings targets for the next three years and said it aimed to reduce its debts to $4 billion by 2005.

It also confirmed it would divest its Oil, Gas and Petrochemicals division, as well as Building Systems this year.

ABB is selling assets to cut a $9 billion mountain of debt – on an equity base of $1.8 billion – at the end of September.

swissinfo with agencies

ABB facts

For the deal to be finalised, ABB needs the agreement of 75% of the 111,000 claimants.
Combustion Engineering will then be put into Chapter 11 bankruptcy.
A trust will be set up to handle the asbestos claims.
ABB’s raised its cash offer by $50 million, on condition that revenues hold up.