Feds Are Asked to Support: A Big Steel Combination: The Merger Would Require Increased Tariff Protection For Steel and Payment of Certain Employee Benefits

The hurdles that the potential merger of USX-U.S. Steel Group and Bethlehem Steel Corp. – a proposition publicly floated in early December – will have to clear could make other hard-to-close deals like American Electric Power Co.’s acquisition of Central & Southwest Corp., which took more than two years to finalize, look easy. The merger between USX-U.S. Steel and Bethlehem Steel, the numbers one and three steel makers, respectively, would require the government to increase protection against imports for American-made steel, pay all or part of the companies’ pension and retiree health care benefits, and, of course, clear the deal on antitrust grounds. Also needed would be concessions from the United Steelworkers of America, which represents about 140,000 steelworkers. And, yes, Bethlehem Steel is already in Chapter 11, but the deal might also include the country’s fourth-largest steel maker, LTV Corp., which is also under court protection as well as other producers in a sweeping industry consolidation. “It’s not likely that this plan will work,” says Charles Bradford, an independent steel analyst who has monitored the industry for decades. “Even if the steel industry gets additional trade relief, that doesn’t solve the real problem, which is overcapacity.” Still, USX-U.S. Steel and Bethlehem Steel, the founding partners of the potential consolidation, can point to some upside on what will be, at the least, a complicated process of reorganizing the domestic, integrated steel industry. Integrated steel producers make various types of steel products through long processes, starting with the refinement of iron ore. The planned merger doesn’t include steel producers that re-melt already produced, or scrap, steel before turning it into usable product. The largest company in that sector is Nucor Inc., which has attacked the plan. “The deal proposal is nothing more than an attempt to get the federal government to help a couple of companies at the expense of the rest of the U.S. steel industry and the taxpayers. Our government should not be picking favorites within the industry,” says Don DiMicco, Nucor’s president and CEO. On the tariff front, the integrated steel makers won some relief on December 7, when the International Trade Organization recommended that President Bush adopt tariffs and quotas that would range from 5% to 40% on 16 key steel products. But this relief to the steel makers raised objections from some quarters. “Protectionism may provide some short-term benefits, but in the end, it deludes policymakers into not making rational decisions,” Bradford says. Dealing with the union might not be the stickiest part of the proposed deal because the United Steelworkers is supporting the pact. And despite the presence of two bankrupt companies in the talks, other non-Chapter 11 steel makers, such as Weirton Steel Corp. and Wheeling Pittsburgh Steel, also may participate. An additional partner could be National Steel Corp., which is controlled by Japan’s NKK Corp. It said it has begun talks with USX-U.S. Steel about inclusion in the merger. Steel executives pushing the pact have argued that the U.S. needs domestic steel production for national defense and security reasons. The prospect of a federal takeover of the pension and health responsibilities of the companies would be supported by a large base of retirees in such politically important states as Ohio, West Virginia, Indiana, and Pennsylvania. Still, the prospect of the federal government bailing out private companies is the most difficult part of the plan for many observers to visualize. The steel industry’s “legacy” obligations are estimated to be $13 billion in retiree health care costs for about 600,000 former steel employees. “The industry’s exposure on the pensions and retiree health care is worse than what is on their books now. With the stock market down and interest rates cut, the companies’ liability in these areas has ballooned,” Bradford states. For U.S. Steel to buy any of the companies it is talking to, the government would have to assume both pension and retiree health care responsibilities, notes Leo Larkin, an analyst at Standard & Poor’s. “If you give any subsidy to steel, it’s going to open up a whole new can of worms with other industries that are sure to request similar packages,” he says. Despite being able to invoke the national defense argument, the USX-U.S. Steel plan strikes antitrust lawyer Harry Davis of Schulte Zabel & Roth as potentially tough to sell to antitrust regulators. “Normally, when talking about a merger of major producers, you start talking about efficiencies and how this will result in a lower cost structure and benefits to the consumer. Here it is being pitched as a way to raise prices in order to protect the industry. To say it’s a novel approach is to understate it,” he says. Davis also notes that a consolidation aimed at raising prices is likely to draw fierce opposition from such key customers as the auto, machinery, oilfield equipment, and appliance industries which would face substantially higher costs. Whether it’s done through this novel approach or not, Larkin notes that the steel sector needs to remove inefficient capacity. He believes that the industry would accomplish this goal one way or another. “Either the government will play a role or it will be done solely by market forces. Either way it has to happen,” Larkin says.