Bouchards, workers take a hit on demise of Point deal

December 19, 2007|By JAY HANCOCK

The demise of a deal to sell the Sparrows Point steel plant is another disappointment for employees, whom suited financiers have jerked around for years. But it's worse for Esmark Inc. and Chicago's Bouchard brothers, who badly need the Point to subsidize their hemorrhaging Wheeling-Pittsburgh mills with cheap slabs.

Esmark, however, would have owned only 2 percent of the company, we learned this week. So the people who wanted the deal most came to the table with the least.

You needn't be a Goldman Sachs partner to understand that, two weeks after the U.S. Treasury secretary acknowledged "turmoil" in the credit markets, 2 percent down is not a great way to get a deal done. What's true for Miami McMansions is true for Maryland factories.

To the Bouchards' credit, they always acknowledged their financial contribution would be small. To their discredit, they kept suggesting the rest wouldn't be a problem.

Esmark stock has fallen by half since early December, when the deal began to wheeze.

I wonder how shareholders feel about Craig Bouchard's August statement that "our deal will close rapidly" after approval by the Justice Department and a trustee. Justice signed off in September.

James and Craig Bouchard headed a motley consortium that was supposed to buy the Point for $1.35 billion.

Esmark, their steel distributor, recently merged with Wheeling-Pitt, which owns struggling plants in West Virginia and elsewhere. They got a chance to buy the Point after the government ordered ArcelorMittal to sell it for anti-monopoly reasons.

But everybody else involved in the transaction had interests diverging - some of them sharply - from those of Esmark and the Bouchards.

None of the partners is saying much publicly. Craig Bouchard didn't respond to an e-mail inquiring which financier pulled the plug.

But Brazil's Vale, Ukraine's Donbass, Durham Capital and other investors helping put up $790 million in equity may not have been thrilled with Esmark's plan to sell Sparrows Point slabs to Wheeling-Pitt at below-market prices.

Craig Bouchard has said the arrangement would help Sparrows Point by boosting production and lowering unit costs, but financial partners may have just seen lower profits.

Wheeling-Pitt has lost $158 million this year through September in one of the best environments for U.S. steelmakers in recent memory. Why stake millions to subsidize someone else's losing operation?

Even if they wanted it to close, Vale and Donbass are raking in so much dough in the global boom they can't be upset the deal flopped. Yesterday Vale officially pulled out. ArcelorMittal, which didn't want to sell in the first place and is booking huge profits at the Point, probably isn't in any hurry.

Surely President Bush's Justice Department wished for success. It would have loved to have sold the Point to an American-led group just before a presidential election.

But U.S. bureaucrats can't force a transaction if private money isn't willing.

Equity partner Franklin Mutual, an affiliate of Franklin Templeton mutual funds, also needed the deal. As Esmark's biggest shareholder, Franklin is at risk if Wheeling-Pitt doesn't recover. But Franklin will never put up the whole equity piece for Sparrows Point itself.

Banks were another questionable link.

The buyout would have required $590 million borrowed from lenders whose identifies were never disclosed.

Maybe one was J.P. Morgan, a big Esmark banker, whose chief of leveraged finance recently bemoaned in Mergers & Acquisitions that a recent plunge in the value of debt securities is "the largest shift in pricing in the shortest period of time ever experienced in the loan markets."

Craig Bouchard has suggested that the Point's debt financing was less at risk than in some other acquisitions because banks had agreed to lend money without first obtaining agreements to syndicate parts to third parties.

Even so, reluctant lenders have spiked many a merger this year and could have been a factor in this one.

The shame is that a completed Esmark deal would have been good for Point employees.

Esmark wanted the mill for its deep-water access and its finishing lines, of course. But it also wanted the blast furnace for creating raw steel from ore and would have been more likely to undertake the expensive and necessary task of refurbishing it in a few years.

The next would-be buyers may or may not have the same intention. But they'll certainly have deeper pockets and better-aligned goals.

jay.hancock@baltsun.com

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