137CASE IN POINT
FRUIT OF THELOOM, 2002In 2001, while Fruit of the Loom was operating under the su-
pervision of the bankruptcy court, Berkshire Hathaway offered
to purchase the apparel part of the company (its core business)
for $835 million in cash. As part of its bankruptcy agreement,
Fruit of the Loom was required to conduct an auction for com-
petitive offers. In January 2002, the court announced that Berk-
shire was the successful bidder, with the proceeds of the sale to
go to creditors.
At the time of Berkshire’s offer, Fruit of the Loom had a
total debt of about $1.6 billion—$1.2 billion to secured lenders
and bondholders and $400 million to unsecured bondholders.
Under the terms of the agreement, secured creditors received
an estimated 73 cents on the dollar for their claims, unsecured
creditors about 10 cents.
Just before f iling for bankruptcy in 1999, the company had
$2.35 billion in assets, then lost money during reorganization.
As of October 31, 2000, assets were $2.02 billion.
So, in simplif ied terms, Buffett bought a company with $2
billion in assets for $835 million, which went to pay the out-
standing debt of $1.6 billion.
But there was a nice kicker. Soon after Fruit of the Loom
went bankrupt, Berkshire bought its debt ( both bonds and bank
loans) for about 50 percent of face value. Throughout the bank-
ruptcy period, interest payments on senior debt continued, earn-
ing Berkshire a return of about 15 percent. In effect, Buffett had
bought a company that owed him money, and repaid it. As
Buffett explained it, “Our holdings grew to 10 percent of Fruit’s
senior debt, which will probably end up returning us about
70 percent of face value. Through this investment, we indirectly
reduced our purchase price for the whole company by a small
amount.”^13
(Continued)