W.L. Ross Looks To Buy Bethlehem Steel –

Wilbur Ross Jr.: a superman or just the man of steel?

While it’s unknown if Ross has a secret identity as a superhero, he solidified his reputation as the man of steel recently by offering to acquire Bethlehem Steel Corp. for $1.5 billion, with designs on resuscitating the struggling steel industry.

After initially acquiring LTV Corp. in March 2002 for $325 million – and subsequently renaming the company International Steel Group – the Ross-led distressed buyout firm WL Ross & Co. LLC next fixed its eyes on another hobbled steel giant, the formerly defunct Acme Steel, buying its assets for $65 million.

The proposal needs the acceptance of Bethlehem’s board of directors before it can be submitted to the Bankruptcy Court for approval. In October 2001, Bethlehem filed for Chapter 11 bankruptcy protection, citing in its press release, “The injury caused by record levels of unfairly traded steel imports and the slowing economy that have severely reduced prices, shipments and production.”

The offer, which ISG submitted just prior to the close of its 60-day period of exclusivity, has the backing of current Bethlehem Chairman and CEO Robert S. Miller, who said in a statement, “Based on the financial challenges that Bethlehem has faced, we believe this merger with ISG would be the best avenue toward achieving [certain] goals….Receipt of a proposal from ISG is certainly a positive development, and I am hopeful that we can reach an agreement in the near future.”

However, Miller said that Bethlehem is keeping its options open, indicating on the company’s Web site that Bethlehem is also “working toward a stand-alone plan of reorganization’….”

WL Ross has been in talks with Bethlehem to acquire the company from as far back as November 2002. Terms of the offer were not disclosed, but the deal would include all of Bethlehem’s steel-making and related assets, and leave out its shuttered coal mines and plants. Additionally, the deal would not assume Bethlehem’s $3 billion in pension benefits. If the transaction does go through, it would create the largest steelmaker in the U.S., shipping roughly 16 million tons of steel annually.

At the heart of WL Ross & Co.’s vision to mold International Steel into a profitable company is the procurement of labor concessions from the workers at the companies that it acquires. When WL Ross acquired LTV, ISG reworked the agreement with the United Steelworkers of America (USWA) to streamline production incentives, establish profit sharing and bind pension benefits to the company’s performance.

If the deal goes through, ISG will look for the same concessions from the Bethlehem workers. “Upon the purchase of Bethlehem’s facilities, we anticipate a quick and orderly transition to the ISG business model and culture, and the application of our new USWA labor agreement,” ISG CEO Rodney B. Mott said.

However, it is no secret that a deal would lead to substantial job cuts at Bethlehem. With the LTV acquisition, ISG trimmed the workforce at LTV plants by roughly 30% to 40 percent. Additionally, it is expected that there would be a number of cuts at Bethlehem’s corporate headquarters in Pennsylvania, which would lighten the load for a move to Cleveland, where ISG’s management resides.

As painful as these cuts can be, it is accepted that they are necessary if the U.S. steel industry is to regain its footing. Marvin A. Davis, a managing partner at turnaround firm Grisanti, Galef & Goldress, told Buyouts, “The steel industry has needed to consolidate for quite a while, and in order for this to succeed, companies will need to trim back excess personnel and make production as efficient as possible.”

Another factor that could help the industry recuperate is the Bush Administration’s decision to impose tariffs of as much as 30% on certain steel imports. The tariffs were enacted in March 2002 to provide the domestic steel industry a three-year window within which to recover after years of struggle, and are designed to help consolidate the industry and trim surplus capacity.

Nearly one year since the tariffs have been imposed, it is clear that the industry has begun to consolidate. In addition to ISG’s efforts, U.S. Steel has agreed to acquire National Steel, while Nucor, with acquisitions of Birmingham and Trico, and Steel Dynamics, with its Qualitech purchase, were also busy. These deals have drawn applause from others in the industry. Wheeling-Pittsburgh Steel President and CEO James G. Bradley weighed in on the recent activity, saying that the consolidation is transforming the steel industry into a healthier, more competitive marketplace.

However, it remains to be seen where the industry will go from here. In a note to clients, Credit Suisse First Boston said, “Despite the industry’s relatively successful focus on cost control and the somewhat less successful efforts to improve capital efficiency, the fortunes of [steel] market participants are governed largely by the supply and demand balance.”

“We believe the supply side of the equation could have the greatest influence on the overall market balance,” CSFB continued. “Furthermore, we believe the conditions conducive to structural industry change are, or will soon be, in place.”

WL Ross & Co., meanwhile, remains active in other areas as well. In December, the company agreed to acquire Ohizumi Manufacturing, a Japan-based manufacturer of auto parts, for $69.8 million, or 8.4 billion yen. The firm may decide to merge Ohizumi with its Nikko Electric portfolio company, which is another Japanese car-parts company the firm acquired in 2000.