There was never any dispute that the domestic steel space needed remodeling. Just two years ago, the industry was getting battered by foreign competition, and the ponderous labor agreements were an albatross the sector just couldn’t shake. It was clear something had to be done. With that said, nobody expected one man, who is now less than a month away from his sixty-seventh birthday, to do all of the heavy lifting.
With the sale of International Steel Group in a $4.5 billion merger with Ispat and LNM Holdings (which will collectively form Mittal Steel), Wilbur Ross, through W.L. Ross & Co., effectively orchestrated a turnaround that analysts say has changed the face of the entire steel industry. At the same time, the sale will deliver returns to Ross and his co-investors that could bring to mind such names as Carnegie and Schwab.
J.P. Morgan Securities, in a research note to clients, said, “Wilbur Ross and his limited partners will receive a quoted $42 per share for ISG or 14x their cost basis of about $3 per share.” Throw in $12 million in annual fees and this transaction clearly qualifies as a bonanza for the investors.
Meanwhile, the Mittal family, which controls Ispat and LNM Holdings, will also receive a $2 billion payout in the form of a cash dividend, according to J.P. Morgan, which will take place prior to LNM’s merger with Ispat.
Calls to Ross were not returned by presstime, but in past interviews he has generally put on a humble facade. Ross told Buyouts this past March, “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. But, as a group, I think we really did change things and help turn things around.”
ISG was formed by W.L. Ross a little more than two years ago and began with a $375 million bet on a then-bankrupt and barely idle LTV Corp. Following that purchase, ISG went on to acquire Acme Steel in a $65 million deal and also plucked Bethlehem Steel Corp. from bankruptcy protection for $1.5 billion. The company was then floated in an IPO in December of last year, and soon after, added Weirton Steel to its mix.
The thesis behind ISG was never just a rollup. Rather, the firm wanted to coordinate a consolidation that would allow all the companies added to the platform to free themselves from the unwieldy labor agreements, while at the same time emancipating the businesses from any legacy costs associated with past agreements. The $375 million purchase price of LTV was actually less than the company was paying in interest payments on its debt each year.
Further, ISG had counted on tariffs to help level the playing field for the domestic steel producers. And while the original tariffs did not ultimately stick, ISG did benefit from a weak dollar that helped accomplish the same goal, while a surge in steel prices provided an added wind to the company’s back. In October, for example, the price of cold rolled steel reached $740 per ton, representing a 68% jump from January of this year.
Putting the International in ISG
The merger forms what will become the largest steel company worldwide based on revenue, market capitalization and production capacity. Lakshmi Mittal, who controls both Ispat and LNM, will assume the role of chairman and CEO of the combined company, while Ross will hold a seat on the board. Rodney Mott, ISG’s current chief executive, will takeover as CEO of Mittal’s combined U.S. operations.
Under the terms of the agreement, ISG shareholders will receive $42 per share in cash and stock, split right down the middle. The sale of ISG will occur only after Ispat acquires LNM Holdings, which is expected to happen before the end of the year. ISG has negotiated a breakup fee of $125 million, should the deal- expected to close in the first quarter of next year-fail to go through.
In a conference call, Ross listed the merged company’s competitive advantages, which included its “unmatched” scale and scope, “geographic and product diversity,” as well as its strong financial profile.
Analysts have largely applauded the transaction. FTN Midwest Research Securities Corp., noted, “We believe this deal is positive for the domestic steel industry as continued consolidation by rational, profit driven players should help the pricing environment, especially compared to the mass bankruptcies of the early 2000’s.”
The only question left is whether the merger will pass regulatory clearances, and while some are anticipating the automotive market to lodge some complaints, most analysts don’t believe those will stand in the way.
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