Sparrows Point's owner is sold to Dutch company

$4.5 billion deal should secure future of former Bethlehem Steel plant

October 26, 2004|By Paul Adams | Paul Adams,SUN STAFF

International Steel Group founder Wilbur Ross, who pieced together the nation's largest steel producer from the bankrupt remnants of Bethlehem Steel and LTV Steel Corp., agreed to sell his company to Indian-born billionaire Lakshmi N. Mittal for about $4.5 billion, creating the world's largest steelmaker.

The transaction, which labor leaders and company officials said could solidify the future of ISG's Sparrows Point plant in Baltimore County, will have operations in 14 countries, generate sales of more than $31.5 billion and employ 165,000 workers.

"I don't see any downside with the exception of the fact that anytime there's a change in the structure of the company, people get nervous," said John Lefler, ISG's vice president and general manager at Sparrows Point.

The deal is the latest milestone in the long road back from the brink of extinction for the Sparrows Point mill, which employs 2,500 workers and remains a critical link to the city's industrial past. Company officials said yesterday they do not expect to cut jobs or close mills.

ISG will become part of Mittal Steel Co. early next year after Mittal merges his family's Rotterdam-based Ispat International NV and LNM Holdings NV in a transaction valued at $13.3 billion. The combined steel company will be headquartered in the Netherlands and overtake Luxembourg-based Arcelor SA as the world's largest.

"This industry has needed consolidation very badly," said Lewis Johnson, an industry analyst with Baltimore-based T. Rowe Price Associates. "Industry consolidation tends to help smooth out the worst of the up cycles and the down cycles. Steel is an incredibly volatile sector."

The deal comes as the long-beleaguered steel industry is enjoying soaring prices and strong demand as a result of China's insatiable thirst for raw materials to power its manufacturing economy. Announcement of the transaction sent steel stocks up yesterday as analysts and investors speculated about more deals. ISG shares climbed $5.57 per share, or 19 percent, to close at $35.25 in trading yesterday.

Mittal and Ross are both regarded as risk-taking billionaires who have led efforts to merge bankrupt steel mills to create new, leaner companies capable of surviving in the hyper-competitive steel market. Mittal fashioned his steel empire by buying up troubled mills from Eastern Europe to South America. Ross, a former Rothschild Inc. banker who earned a reputation as the "bankruptcy king," made Forbes' list of the 400 Richest Americans in part by buying up bankrupt U.S. steel mills. Freed from the huge pension and health benefits obligations of the legacy steelmakers, he cut costs to make them profitable.

"The Mittals and I met some several weeks ago and we had an immediate love affair in that we both felt that we each had more in common with the other than either of us did with any of the other steel companies," Ross said in a conference call with analysts yesterday.

History of ISG

Ross paid pennies on the dollar for his steel assets and is now selling for a premium as steel prices continue to edge higher, analysts said. He entered the steel market in 2002 with the purchase of LTV Corp., paying less than $400 million for assets the steelmaker once valued at $6 billion. He paid $65 million for Acme Metals Inc. in October of that year and gobbled up Weirton Steel Corp. in spring for $253 million.

He bought the assets of bankrupt Bethlehem Steel, including Sparrows Point, in 2003 for $1.5 billion, minus Bethlehem's mountain of pension and health care debts.

With new cost-saving agreements from labor unions, the company went public for $28 per share in December and reinvigorated the industry. It reported a third-quarter profit of $256.4 million yesterday, compared with a loss of $18.6 million in third-quarter 2003. Sales more than doubled to $2.61 billion.

The cash-and-stock sale to Mittal is worth about $42 per share, or a 42 percent premium over Friday's closing price and 50 percent higher than the $28 share price Ross netted when he took the company public in 2003. Ross personally owns about 6.9 million shares of ISG, or about 7.1 percent of the company, which would be worth $291 million in cash and stock if the deal is approved by regulators.

The deal with Mittal received the blessing of the United Steelworkers of America, whose retirees have had to accept drastically reduced retirement and health benefits as the industry has restructured. The union said the deal will secure jobs by creating a company with greater market power.

"We have succeeded in negotiating our direct involvement in an ongoing relationship," said Leo Gerard, president of the union, in a statement. "We have secured the commitment to maintain and grow steelmaking and finishing capacity in North America."

Ross, who will serve on the board of the new company, echoed those comments in yesterday's conference call with analysts.

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