ISG likely to make bid for Beth Steel

Steelmaker has found nothing to keep it from making an offer for assets

January 05, 2003|By Gus G. Sentementes | Gus G. Sentementes,SUN STAFF

Bethlehem Steel Corp. could get an offer for all or part of its assets as early as tomorrow, but any offer would allow for only a "relatively modest" recovery for many of the bankrupt company's creditors, a potential buyer said.

"The probabilities are that we'll make a bid," said Wilbur L. Ross Jr., head of W.L. Ross & Co., a New York investment firm, and chairman of Cleveland-based International Steel Group Inc. "Everyday we get a little further along ... and we haven't found a total showstopper" that would dash an offer.

Ross declined to say how much ISG was likely to offer for bankrupt Bethlehem's assets. But any offer would be more than $800 million, which is what the secured creditors are owed, he said.

A 60-day exclusive "due diligence" period in which the two steelmakers explore a possible merger expires tomorrow.

Bette Kovach, a Bethlehem spokeswoman, said any offer from ISG would first be reviewed by Bethlehem's board of directors.

An offer would also be subject to review by the company's creditors and faces the possibility of a better offer in an auction for Bethlehem's assets ordered by the U.S. Bankruptcy Court in Manhattan.

"Someone could come along and make a better offer ... . That's always the case in bankruptcy," Ross said. "As far as we can tell, there is no other bidder, or at least there's no one else clamoring to acquire them."

Bethlehem's two largest plants - Sparrows Point, which employs 3,300 in Baltimore County, and Burns Harbor, Ind. - would be included in any offer, Ross said.

"My best guess is that Beth's reasonable alternatives are [merging with] us or as a stand-alone," Ross said. Because of the size of a merged entity, any deal would also be subject to federal antitrust review, he said.

Bethlehem's unsecured creditors are owed more than $500 million, but they must wait until the company's secured creditors are paid before they can recover their costs. Bethlehem's total liabilities amount to more than $6 billion, including pension and other retiree benefit obligations.

The federal Pension Benefit Guaranty Corp., which last month terminated Bethlehem's underfunded pension plan and will assume its obligations, is one of the steelmaker's largest unsecured creditors.

The agency estimates the pension plan is underfunded by $4.3 billion and expects to be responsible for $3.7 billion.

"I'm not saying that there'll be no value for unsecured [creditors], just that it will be relatively modest," Ross said.

Two recent developments, Ross added, have contributed to the woes of Bethlehem's unsecured creditors: the company's poor operating performance in November and the PBGC's takeover of Bethlehem's pension plan.

In November, Bethlehem lost $39.2 million on sales of $276.8 million, according to a bankruptcy court filing. "The practical net effect of that [loss] is to add to the amount of secured debt," which must be satisfied 100 percent before any money can go to unsecured creditors, Ross said.

Bethlehem had hoped to reduce its work force of 12,000 by offering early-retirement inducements to salaried and hourly workers. But the federal takeover of its pension plan, which covers 95,000 workers and retirees, derailed that option.

"By making retirement less attractive, it'll make [workers] more expensive to buy them out," Ross said. "That's the single biggest hurdle."

Working to shed a company's liabilities while picking up its assets is something that Ross has done in the past.

Last year, Ross formed ISG from the remnants of LTV Corp., based in Cleveland. LTV had similar high "legacy costs" - or retiree pension and health care obligations - but Ross acquired only the company's steel-making facilities in a bankruptcy court auction.

Last month, ISG struck a six-year agreement with the United Steelworkers of America that was hailed by many as a model for the steel industry that other companies are expected to follow to stay competitive.

That agreement, which covers ISG's 2,750 workers, is considered a milestone in the steel industry because it ties worker compensation to company profitability and gives management more flexibility in assigning jobs to employees. For their part, workers were guaranteed health care benefits and hourly wages above union standards nationwide.

ISG's agreement with the union also helped give that company a better sense of Bethlehem's future costs because Bethlehem and the union will likely strike a similar deal, said Rodney Mott, ISG's president and chief executive.

Bethlehem is in the midst of negotiations on its own new labor agreement with the Steelworkers union, which could be reached by the end of this month. Union and company officials said they are still working out the details over whether a new labor agreement will be reached with Bethlehem or a possible new owner.

If an offer for Bethlehem is made, the next step would be for the two companies to reach an agreement, with support from Bethlehem's creditors, Ross said.

After an agreement is reached, the court would solicit bids from other potential buyers during an auction, he said.

Jeffrey L. Tanenbaum, an attorney who represents Bethlehem in its bankruptcy case, said the entire legal process could take 60 to 90 days, and the court would have to approve the auction winner.

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