Watts To Buy Bankrupt Heatway
For Watts, it's a way in to the fast-growing U.S. radiant heating market.
For Heatway, it's a way out of the legal morass it's been in since radiant heating systems using the company's Entran II brand of radiant tubing began rupturing.
Heatway filed for bankruptcy on Feb. 25, which followed its court loss earlier that month to Goodyear Tire and Rubber, which manufactured the tubing.
"Most companies that file for bankruptcy protection have few profits and assets, and too much debt," said Dan Chiles, Heatway's vice president. "We're a very profitable company and our only problem is that Goodyear made this defective product."
Four days after filing Chapter 11, Heatway announced the possible Watts bid. "From a business perspective, we're now paying the ultimate price," Chiles added. "We're losing our company. But we wouldn't have done anything any differently. What will come of the sale is a new direction for us with new products. I hope what we'll keep is the loyalty of our contractor customers"
The deal between the two companies had been in the works for quite some time.
"We started courting Heatway two years ago," said Mike Fifer, president of Watts, a publicly traded company based in North Andover, Mass., with 1999 sales of $796 million. "The radiant market in the United States may be small, but it's growing in excess of 20 percent a year, much faster than the overall plumbing industry growth."
While known primarily as a valve control maker for the plumbing industry, Watts Industries has operations around the world, including a PEX plant in Italy the company's run for the past 10 years. Watts has completed 47 acquisitions since it began actively seeking consolidation opportunities 15 years ago.
"Heatway gives us an opportunity to sell the whole radiant package to contractors," Fifer added. "Mike [Chiles, Heatway's president] is a real evangelist for the whole industry. I can't think of a better way to put our toes in the water than with this company."
Fifer said Watts issued a letter of intent to purchase Heatway last January, and was fine-tuning the deal as the Goodyear litigation proceeded. "It was a shock that they didn't prevail," Fifer says. "But we didn't lower the purchase price at all."
The local paper in Springfield, Mo., reported the deal was for $4.5 million. Neither Watts nor Heatway would confirm that figure. Regardless, any sale has to pass muster of Heatway's creditors and be approved by a bankruptcy court judge.
Under Chapter 11, money from the sale will be divided among those creditors. Essentially, two classes of people need to be satisfied:
- Trade creditors, basically companies that Heatway depends upon to conduct its business. Chiles told us there are very few trade creditors to which the company is currently indebted.
- Warranty claimants, or the homeowners suing Heatway over the failure of Entran II. Currently, there are 19 such lawsuits. Chiles also said money must be set aside to handle the possible claims of some 650 other reported failures, as well as the potential for homeowners who may not have a current heating system problem, but could in the future. An estimated 10,000 homes have an Entran II heating system.
In addition, Chapter 11 protection puts a stop to any additional lawsuits against Heatway, and the new company that emerges from bankruptcy would not be liable at all for any future claims.
"We're on a fast track to make this happen," Chiles said, predicting that the sale could be approved in as quickly as 45 to 60 days.
Under terms of the proposed sale, Watts would retain Heatway's name and run it as a subsidiary. The new company would remain in Springfield, Mo., and offer the same products and service it has as an independent. In addition, Fifer says other European-made Watts hydronic and radiant products would be added to the roster.
Last December, Goodyear filed a federal lawsuit against Heatway to recover more than $2.5 million owed Goodyear for the hose product Heatway purchased between 1995-1996. Heatway counter-sued and claimed that all the hose Goodyear had provided to Heatway was defective.
On Feb. 3, a jury sided with Goodyear. However, the company still faces litigation from homeowners, and the Heatway bankruptcy appears to leave Goodyear the sole target of such suits.
Goodyear legal affairs spokesman Fred Haymond preferred not to talk about what effect the bankruptcy announcement would have on his company other than to say "we intend to aggressively defend ourselves."
Haymond did talk about the recent jury decision. "We've strongly believed that the hose we manufactured for Heatway will work fine in a system that is designed, installed and maintained properly," he said. "It's our contention - and a jury agreed with us - that Heatway had a responsibility to communicate with its installers and the homeowners regarding what the system is all about and what needs to be done to maintain it. Heatway did not do what they should have done for their customers."
Haymond added that Heatway failed to educate installers about the intricacies of using the hose. According to Goodyear's Web site, the company discovered during the course of litigation that Heatway never wrote an installation and maintenance manual for Entran II hose.
Haymond's main contention was with the quality of the water that surged through the hose. "You can't just put a fluid in there and forget about it. With the combination of metal parts, water and glycol, the natural chemical process will eventually create a glycol acid, which creates problems."
Haymond says a simple water test for pH levels performed annually would have indicated an acidity problem. Caught early, Haymond says any problems could have been cured with common additives.