These are the salad days for turnaround investors, with economic recovery helping to generate strong returns on recession-era deals. W.L. Ross & Co., however, has done far more than simply resurrect a flagging steel company. Instead, it seems to have salvaged an entire industry.
W.L. Ross, in 2002, launched a rollup platform designed to rehabilitate a domestic steel industry that was hemhorraging both jobs and revenue. Dozens of U.S. steelmakers were either in bankruptcy or on their way, and there seemed to be no stopping the double-barreled assault of product from foreign suppliers and domestic micro-mills. Some political pundits had suggested that the Bush Administration was leaning toward the implementation of tariffs on steel imports, but no final decision had yet been reached by the time that Ross decided to make its initial splash.
Ross announced that it was acquiring bankrupt steelmaker LTV Corp. in February 2003, even though final bids were due one week before Bush was set to rule on the tariff issue (he ultimately sided in favor of a 30% tariff). LTV was operating in “hot idle”, which basically meant that a trickle of material was working through the plant in order to prevent such damage as cracked refractory bricks. Many industry analysts assumed that the company would abandon life support all together, until Ross entered the only and winning buyout bid.
The final deal closed in April 2002, with a total transaction price of $375 million. Broken down, the deal included $80 million in equity from Ross, $95 million from other investors and a $200 million line of credit.
More important than the financial details, however, was the way in which Ross structured LTV’s labor agreement. The company had employed around 10,000 people at its peak, but almost all of those people had been subsequently laid off. Ross proposed sweeping changes that included performance-laden contracts and drastic reductions in the layers of middle management. Union leaders recognized that the Ross proposal represented their only chance to regain thousands of lost jobs, and smiled through the pain of lost benefits.
The result at LTV and subsequent Ross acquisitions under the International Steel Group banner was higher productivity at a lower cost. “Ross convinced the union that this type of contract was LTV’s only savior, and the union in turn has taken one of the least efficient companies in the industry and turned it into a successful and low-cost steel producer,” says Chuck Bradford, a metals and mining industry analyst with Bradford Research/Soleil Securities. “So now you have lower cost creating a higher-quality product, which is really industrial policy in reverse.”
LTV Begets Bethlehem
Ross followed a similar strategy when acquiring bankrupt Bethlehem Steel Corp. in April 2003, although it was a bit more difficult to reach its goal. Bethlehem was similar to LTV in that it was bankrupt, but it had never scaled down to hot idle, meaning around half of the company’s employees would be laid off.
Once again, however, Ross was able to soothe the union’s psyche while simultaneously benefiting the acquired company’s bottom line. In the case of Bethlehem, Ross offered laid-off employees a transition assistance program (TAP) that included the option of a lump sum payment in exchange for foregoing seniority rights to employment recall. A number of other steelmakers have since adopted this TAP formula when acquiring their troubled peers.
All of these moves were made with the new steel tariffs in place, and Richfield, Ohio-based ISG filed for a $250 million IPO on July 31, 2003. Just months later, the World Trade Organization (WTO) ruled that the tariffs were illegal, and President Bush began retreating for fear of an all-out trade war. Wilbur Ross urged against any tariff repeal in a September 2003 interview with Reuters in which he said: “In the total absence of tariffs this industry will not be able to attract new capital or rehabilitate sick companies. You’d probably be taking out another 15% or 20% of the industry capacity, and that will make us that much more permanently dependent on foreigners.”
It was a fight that Ross soon realized he would lose, and he quickly teamed up with other squeaky steel wheels to support a tranched-out tariff repeal. Foreign imports were no longer a significant threat to domestic steel stability, he said, due to rising transportation costs, the falling value of the dollar and an unexpected increase in Chinese steel consumption.
In fact, Ross and ISG were so confident that they increased the number of shares offered in the ISG IPO from 15 million to 16.5 million, and also bumped up the price-per-share range. On Dec. 11, 2003, ISG priced all of its shares at $29 per share for a whopping total of $462 million. Unlike many other private equity-backed companies that priced IPOs in 2003, ISG was still trading significantly above its offering price at press time.
The IPO signaled market approval of Ross’s steel consolidation plan, and its after-market performance all but guaranteed that the New York-based investment firm would do right by its limited partners. ISG also has continued its acquisition strategy, as it agreed last month to buy bankrupt Weirton Steel Corp. of West Virginia for approximately $255 million.
“I think I get more credit than I deserve for reviving the steel industry, because a lot of people worked on these deals and I was sometimes just a cheerleader,” Ross says. “But, as a group, I think we really did change things and help turn things around.”