Beth Steel facing a test of its mettle

Company: After filing for bankruptcy protection, the struggling steel maker has bought some time to forge a strategy for the future.

October 21, 2001|By Kristine Henry | Kristine Henry,SUN STAFF

Bethlehem Steel Corp.'s bankruptcy filing will temporarily lock out the hungry creditors knocking at the steel maker's doors. But now that it has a moment of respite, the one-time giant of American industry must figure out how to emerge from its tenuous position before a tanking U.S. economy, overseas competition and huge labor costs bring the walls crashing down.

Analysts and other experts say it's a daunting challenge.

The new chairman and chief executive that Bethlehem's board hired just four weeks ago - in part to help the company avoid Chapter 11 - is banking on a strategy of union concessions and mergers.

"Chapter 11 buys time and the liquidity we need in the next year," said Robert S. "Steve" Miller Jr., Bethlehem's new leader. "And it gives us the ability to take a fresh look at all consolidation possibilities."

But, with the entire domestic steel industry in virtually the same predicament, observers are hard-pressed to see who could take over Bethlehem's problems - let alone who would want to.

"In short, there's no good way to get out of bankruptcy - there's no solution," said Peter A. Chapman, president of Bankruptcy Creditors' Service Inc., a Trenton, N.J.-based service that monitors companies in bankruptcy. "They've sort of talked to everybody by now, and they don't have a merger deal."

Experts agree that consolidation could be the key to saving not only Bethlehem but the entire domestic steel industry. Bethlehem's officials have been saying for more than a year that consolidation among steel producers must occur, but not much has happened.

"The trend toward consolidation was almost inevitable," said Richard Henderson, a steel analyst at Pershing, a division of Donaldson Lufkin Jenrette. "And now it's quickened because of the Bethlehem filing."

Behind the push toward consolidation is a worldwide oversupply. Global demand for steel is about 725 million tons annually, but producers roll out more than 1 billion tons a year. When supply exceeds demand to such a drastic extent, prices tumble.

The resulting carnage litters the American industrial landscape. Since late 1998, 24 domestic steel companies have filed for bankruptcy; many of those who have escaped it are struggling. U.S. Steel, the nation's largest producer of steel from scratch, lost $21 million last year and $30 million in the most recent quarter alone.

Despite the fact that Bethlehem owns two modern complexes, at Sparrows Point in Baltimore County and Burns Harbor in Indiana, the industry's plight makes its search for a merger partner or buyer problematic even at a fire sale price. "Everybody's in the same boat," said steel analyst Donald Barnett of Economic Associates Inc. "Nobody's got the cash to do anything."

Brian Eisenbarth, senior portfolio manager at Davidson Investment Advisors, said that "other steel companies are going through the same down cycle, and none are really in a solid position to be taking on more debt right now. ... " After Bethlehem filed for Chapter 11 protection Monday, its already depressed stock price fell more, hitting an all-time low of 22 cents on Tuesday. At Friday's closing price of 43 cents a share, the entire company is valued at about $56 million.

But that's not necessarily a bargain.

When Bethlehem filed for Chapter 11 protection, it listed $4.2 billion in assets but $6.75 billion in liabilities, including an unfunded health-care obligation of nearly $3 billion. Its pension fund is underfunded by $1.85 billion. The steel maker has lost $1.4 billion this year and as of Sept. 30 it had a negative net worth, with shareholder equity of minus $303 million.

"It's hard to justify buying the company out even at [less than a dollar] a share and then taking on all that debt," Eisenbarth said. "To try to make a return on that number under current operating conditions would be a major undertaking."

Even foreign producers that might be in a financial position to acquire all or portions of Bethlehem would likely find it an unappealing partner.

"Overseas companies are the ones that could do it, but they are going to run into tremendous political problems and are not going to want to deal with U.S. union contracts," Chapman said. "They will look at retiree health-care benefits and say, `That's not our problem; that's the government's problem. That's the way we do it in our country.'

"It's not going to happen," he said.

Still, Bethlehem will try to do what it can to make itself more attractive to potential suitors - and to simply continue operating.

The obstacles Bethlehem must overcome are numerous and in many cases out of its control.

The recent surge in cheap imported steel came largely as a result of the Asian financial crisis of 1997 and 1998, during which producers overseas sought buyers in the United States, and at times sold their products for less than they cost to produce.

The strong U.S. dollar only exacerbates the problem by making imports even cheaper to buy.

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