Owens Corning Up On Asbestos Settlement, But Beware the Stock (OWENQ)

May.11.06 | About: Owens Corning (OWENQ)

We missed the news on OTC stock Owens Corning (OWENQ) yesterday -- up 78% -- as they settle their asbestos suit for a "mere" $5.1Bn. This is fantastic, but I'm not sure it's wise to buy the stock as the bankruptcy documentation says the following:

Existing Owens Corning stock will be cancelled when an approved reorganization plan becomes effective. 131.4 million shares of new stock will be issued with an aggregate plan value of $3.942 billion. The distribution of shares is described below.

Existing holders of Owens Corning common stock (which will be cancelled upon emergence) will receive warrants to purchase 5 percent of the fully diluted shares of the reorganized company, assuming exercise of all warrants but ignoring management options, at an exercise price of $45.25 per share. The warrants can be exercised within seven years of the effective date.

So this is great for the company but not for current shareholders, who could end up with only the right to pay an additional $45.25 to buy into the new company for each 10 shares of stock that they own (which will be cancelled worthless). If you buy into the company's forward valuation of $6Bn (it is currently worth $91M actual dollars, even after Wednesday's run) then it's a $16, 7 year option - pre asbestos this company was never worth more than $2Bn.

Even allowing for inflation since the 2000 crash, $6Bn may be a stretch out of the box, but I do think the potential is there for them to grow into it.

I would rather wait until they are officially out of bankruptcy to play this game so we can get a handle on how the operating costs stack up outside of court protection, but this company can drop $600M a year to the bottom line and really bears watching!