Two Steel Deals Speed Old-Economy Consolidation

The long-awaited consolidation in the steel patch took off in January with back-to-back bids for two bankrupt producers. The first shoe to drop was International Steel Group Inc.’s pact to buy Bethlehem Steel Corp. for $1.5 billion, including the assumption of $500 million in debt. Three days later, United States Steel Corp. announced that it would acquire most of bankrupt National Steel Corp. for $950 million – $650 million in cash, $100 million in stock, and the assumption of $200 million in liabilities. Both targets welcomed the bids and both are dependent on approval from the bankruptcy courts. January’s deal activity follows the decision by President Bush in the spring of 2002 to impose tariffs on imported steel. At the time, the administration had said that one goal of setting the tariffs was to facilitate consolidation among U.S. steel makers. John Anton, a steel analyst at Global Insight, a Washington, D.C., consulting firm, notes, “The administration’s action had the effect of enabling the sale of Bethlehem and National as going concerns rather than as companies in liquidation.” Because the country needs some of these producers’ capacity, they would have been bought even without the tariffs, although perhaps not as functioning businesses, he adds. A key to both deals is the ability of the new owners to craft labor agreements that sidestep the estimated $12 billion to $13 billion in health and other benefits – the so-called legacy costs – that each of the bankrupt companies carries. According to Charles Bradford, an independent analyst based in New York, Wilbur Ross, the magnate behind International Steel Group, will attempt to carve out a labor agreement with terms similar to those he was able to get in his December 2001 takeover of bankrupt steel maker LTV Corp. In that deal, only 60% of the union work force was rehired, none of them with the union’s previous level of health-care or pension benefits. “In the LTV agreement, Ross was able to take about $100 out of the $400 cost of producing a ton of steel. This gives him a huge cost advantage in the marketplace,” Bradford says. Other aspects of the LTV agreement that could be mimicked in labor pacts growing out of January’s deals is Ross’ agreement to put money into a fund that can be used by retired workers for health benefits. Also available to workers is medical assistance provided through the trade act passed by the Bush administration and designed to protect workers who lost their jobs due to imports. “You have a situation where the union is picking the winners and losers in the industry’s consolidation,” Bradford notes. On the question of price, Leo Larkin, an analyst at Standard & Poor’s, says that the acquirers could have gotten a cheaper price by waiting for their targets to go into liquidation. However, Bradford says, “The problem with buying a steel maker in closure is that it has lost its customer base and it is costly to get production started again.” It had cost Ross as much as $25 million to get LTV producing after his acquisition, he adds. One significant detail in the labor agreement between the acquirers and the sellers in the two deals is management’s ability to shift production from one plant to the other, Bradford states. He says it remains to be seen whether the union will allow management as much flexibility as it desires on this question. It is important because efficiencies come from using plants with the longest possible run cycles. However, shifting certain types of production within the newly combined companies may affect the financial benchmarks that will be part of the labor agreements. Acquisition targets in a second round of industry consolidation could include Weirton Steel Co., AK Steel Holding Corp., and Wheeling-Pittsburgh Steel Corp., Anton says.