Sparrows Point plant to be sold to new subsidiary of Renco Group

Deal with Severstal estimated at $1.2 billion, expected to close this month

March 02, 2011|By Andrea K. Walker, The Baltimore Sun

The Russian owner of the Sparrows Point Steel Mill said Wednesday it is selling the Baltimore County plant — once vital to building the company's U.S. footprint and to Maryland's manufacturing industry — to the Renco Group because the business isn't profitable enough.

The sale is part of a $1.2 billion transaction, expected to close later this month, that also would transfer Severstal plants in Warren, Ohio, and Wheeling, W.Va., to Renco.

The deal would be the fourth ownership change at the plant since Bethlehem Steel declared bankruptcy in 2001. The downfall of that longtime owner ushered in years of uncertainty at the plant, which in its heyday employed tens of thousands of people. Recent owners have stumbled, and Severstal had temporarily laid off about 1,000 workers — half of the work force.

Renco, a privately-owned company based in New York, often buys struggling companies and resells them, though it also continues to run a number of businesses. While analysts said Renco is expected to ramp up production at Sparrows Point again — a move that would be cheered by workers and the community — they also noted that the company's environmental record and debtload have been criticized.

The decision to sell comes nearly three years after Severstal paid twice as much — $2.2 billion — to buy the three facilities, including $810 million for Sparrows Point. At the time, Severstal had plans to modernize and invest in the facilities and build its U.S. business.

Sergei Kuznetsov, chief executive of Severstal North America, told employees in a letter obtained by The Baltimore Sun that he thought the Renco Group "will be better positioned to make them collectively profitable."

Severstal has said for months that Sparrows Point's profitability suffered during the weak economy from sluggish demand for steel and skyrocketing commodity prices that increased production costs. The first round of temporary layoffs implemented by Severstal began in July.

Severstal tried "to meet the challenges this downturn has caused," Severstal spokeswoman Katya Pruett said. But the company concluded "that the best course of action is a sale of these assets to a third party."

Renco has created a new subsidiary, RG Steel, that would be based at Sparrows Point and become the umbrella company for the plants. Its steel-making capacity would be about 7.5 million tons a year.

"The formation of RG Steel will create a dynamic, service-oriented company with strategically located facilities," Ari Rennert, Renco Group president, said in a statement.

Renco officials declined to discuss the company's plans for production and the impact on employees.

The company, with more than $5 billion in revenue, has made 40 acquisitions since it was founded in 1975, according to a company website. Its current holdings span a wide range of industries.

It owns and AM General LLC, a company that designs Humvees and other special purpose vehicles for the military and other commercial customers, and Kings of New Castle, a chain of jewelry stores based in West Virginia. It also owns US Magnesium, a Utah maker of magnesium-based products that has been tangled in legal fights with the Environmental Protection Agency.

Charles Bradford with Affiliated Research Group, an independent research firm, said many Renco operations "have humongous environmental issues."

At Sparrows Point, analysts expect Renco to try to ramp up production shortly after the transaction is completed. It would take several weeks to restart the blast furnace, which creates raw steel from ore. Severstal had idled the blast furnace for several months.

Renco will still face many of the same hurdles as Severstal in making the plant a profitable venture. The cost of raw materials, which the company buys rather than produces, remains high. Demand for steel is low because of continued weakness in the construction industry and other areas, and many of Sparrows Point's operations are in desperate need of upgrades.

"Of the three plants, Sparrows Point has the most potential by far, but even it is going to need some work and capital to make it a more advanced and competitive mill," said Michael Locker, a New York steel consultant with Locker Associates. "These steel mills need capital investments, and we're not talking in terms of tens of millions of dollars, but hundreds of millions."

Locker also pointed out that the continued weakness in the real estate market enabled Renco to buy Sparrows Point at a relatively low price. He said he wouldn't be surprised if Renco one day decided to sell the facility when the steel and real estate markets improve.

"My guess is that Renco doesn't have a long-term interest in this facility," Locker said.

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