Bethlehem considers merging of steel

But consolidation of industry faces several roadblocks

March 14, 2001|By Kristine Henry | Kristine Henry,SUN STAFF

A shareholder proposal that Bethlehem Steel Corp. is supporting directs the company to aggressively pursue consolidation among U.S. steel producers. What the proposal does not do is tell Bethlehem's management how to accomplish that goal - one that is teeming with downsides and roadblocks.

North America has about 10 major steel producers, and analysts and industry leaders agree that is too many. Businesses, be they airlines or banks, are consolidating and the steel industry needs to follow suit. Without economies of scale, the companies are virtually held hostage by their customers and find it difficult to set prices at levels that will get them out of the red, they say.

But calling for mergers is easier than drawing up the blueprint. "The industry has to get down to three or four players," said steel analyst Charles Bradford of Bradford Research in New York. "The problem is coming up with the right structure."

Steel makers seeking to team up face several major hurdles, including constricting union contracts, health care liabilities for retirees, and customers who don't want to see their number of suppliers decline.

But one of Bethlehem's major stockholders says it's time to overcome these problems and find a way to make it work.

Greenway Partners LP of New York, which owns about 7 percent of Bethlehem's shares, wants its fellow shareholders to direct the company's management and board to take action on the consolidation front.

"We ask our fellow shareholders to join with us and send a message calling for BOLD action in taking the lead in fostering major steel industry consolidation in the United States," says the proposal, which was included in Bethlehem's proxy filed with regulators Monday. "Present circumstances dictate a need for more than just `business as usual.' The time has come for action."

Bethlehem, the nation's second-largest integrated steel maker, supports the proposal and said it will do what it can to maximize shareholder value. But details can be tricky.

Contracts with union workers make it hard to close facilities and hard to lay off employees - two key components in consolidation.

Retiree health care liabilities also present a barrier to mergers or acquisitions as companies without liabilities are not eager to take them on. Bethlehem, according to its 2000 annual report, has a health care benefit liability of nearly $1.8 billion.

Customers also present a problem. The big three automakers like having lots of suppliers; if one supplier tries to raise prices, the automakers can go elsewhere. When steel companies have joined forces in the past, automakers took some of their business elsewhere - killing one of the key sought-after synergies of a merger.

That means that if Bethlehem and one other major steel maker were to merge, they probably still would not be big enough to overcome the automakers' extraordinary power, Bradford said.

"It makes much more sense to take three [companies] at a time," he said. "You have to be big enough that you're important to the customer. You can't be so small that you don't count."

Bradford said every large steel maker in the country has looked at merging with or acquiring each of its major competitors, to no avail.

"It's really hard to come up with a combination that makes sense," he said.

Bethlehem's former chairman and chief executive, Curtis H. "Hank" Barnette, said last year that the steel maker might be interested in buying another company but is not interested in being acquired.

"Bethlehem is not for sale," he said. "Having said that, if any responsible party sought to have a meeting with us about any responsible matter, we would listen. But the likely conclusion would be the same."

The current chairman and CEO, Duane R. Dunham, was not available for comment yesterday. However, the proxy indicates that management is open to ideas: "Bethlehem has explored, and will continue to explore, opportunities for joint ventures, partnerships, facility sharing arrangements and mergers."

Bethlehem, which employs about 4,000 at its Sparrows Point plant in Baltimore County, lost $118.4 million, or $1.21 a share, in 2000 on sales of $4.2 billion, compared with a loss of $183.2 million on sales of $4.1 billion in 1999.

Its shares closed at $2.68 yesterday, up 11 cents, and it has a market cap of about $348 million.

"These guys have busted their butts trying to make a profit and if [someone] thinks they can run it better and offers a premium, I think this management team will take it," said John Tumazos, an analyst at Sanford C. Bernstein in New York. "I think the Bethlehem guys understand it's not that easy to put one of these [deals] together and they would just as soon be the seller than the buyer."

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