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Bethlehem Steel on the Block

Tuesday, January 14, 2003 at 3:08 PM

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At this time last year the steel mills owned by bankrupt LTV in Cleveland looked like they would shut down for good. The company was liquidating and almost ruined their furnaces by turning them completely off. The mills were saved when a group of investors called the international steel group bought LTV. The new owners, led by W.L. Ross are now making steel and profits. Managers of ISG say they are ready to expand by purchasing the bankrupt Bethlehem Steel Corporation. ideastream's Mike West looks whether the young company is biting off more than it can chew.

When the international steel group bought LTV Steel, company leaders insisted they could succeed in an industry with a long history of failure. They claimed their new management style would turn things around. So far it has. ISG now plans to expand its capacity with the purchase of Pennsylvania-based Bethlehem Steel. Mitch Hecht is the chief financial officer for the international steel group. He works for W.L. Ross, who has a world wide reputation for buying and turning around businesses that range from banks to telecommunications. Hecht insists Bethlehem, with the backing of Ross, can be transformed into a money-maker.

Mitch Hecht: I think it’s natural to be uncertain about the future. I think what we managed to do at LTV we can certainly replicate at Bethlehem… and that is really our corporate staff is focused on identifying those people at the existing facilities who can operate in our culture and really change the way we do business.

However, Bethlehem Steel is different from the LTV situation. ISG was able to negotiate a labor agreement that eliminated millions in retiree medical and pension expenses. At Bethlehem, some retiree costs are still in question. Union and company leaders expect many of Bethlehem’s 12,000 workers to lose their jobs.

Cutting workers and keeping the best of who’s left is the key to success at ISG. The company produces all the steel it needs with half as many hourly workers and 60% fewer managers. Hecht says even union leaders are behind the Bethlehem takeover, despite the job cuts.

Mitch Hecht: We’ve gained a lot of experience with putting our culture into what was the old integrated steel mentality, integrated steel culture. We’ve been pretty successful at it. It has been 12 months, but then again the steelworkers union has had a chance to see what we have done and they are quite happy about what we’ve done and they are our biggest supporters in terms of creating this partnership to expand and transplant our new culture to the Bethlehem facilities.

ISG workers must perform additional tasks but they do them under less direct supervision and employees say the new owners value their opinions, boosting moral. The rank and file are also rewarded with production bonus checks and profit sharing.

Pat Gallagher is a United Steel Worker representative who also served on the ISG contract bargaining committee. He admits the turn-around might seem too good and says it’s natural for some workers to wonder if ISG is taking a chance by expanding.

Pat Gallagher: With any new venture there is some risk involved. But we believe that we, that ISG, has the capitol to maintain the facilities. We have the commitment from them that they are going to run the facilities.

There is good reason to have doubts. One of the factors in the downfall of LTV was executives who invested hundreds of millions of dollars in projects that went sour. But Gallagher feels in this case, ISG leaders know what they’re doing.

Pat Gallagher: Our relationship with the ISG management has been one that they have lived up to every commitment they have made with us. We’re not going into this with blind trust. We’ve had some of our financial people take a look at the purchase, they think it can be done. It is viable it could be a good thing for our members and that’s why we are going forward.

The nature of consolidation means cutting jobs. But Gallagher says the union has accepted the trend as a way to preserve what’s left of the American steel industry which has seen dozens of failures and bankruptcies in recent years.

Pat Gallagher: The steel worker’s policy is that we need consolidation to have the strength in the marketplace to get the fair price that our companies need to be profitable and to keep our jobs and job security. So I think in the long run, the acquisition of Bethlehem by ISG might make them a stronger company. They’ll have more voice in pricing in the workplace and lead to more job security, not only the existing ISG workers but those at Bethlehem that are coming over to ISG.

Robert Brooks has been watching the steel industry for 14 years. He’s the editor of Metal Producing and Processing Magazine based in Cleveland. Brooks is hard pressed to find fault with the take-over.

Robert Brooks: I don’t think Bethlehem has any particular problems that will not be cleared away in the course of the purchase. The problems that put Bethlehem into bankruptcy were broadly speaking access to capitol. They could no longer service the debt that they had accrued.

Brooks says banks are in no mood to lend to steel companies because too many have failed. He feels the only possible pitfall to the Bethlehem deal would be if ISG has to borrow too much of the $1.5 billion price tag.

Robert Brooks: ISG has to be mindful of acquiring debt too quickly, but other than that, I don’t see any reason why shouldn’t do it. The Bethlehem facilities are really good and they would have been acquired by somebody at some point.

ISG’s Mitch Hecht says financing will come from short-term debt backed by solid assets and from investors. He expects his company to repay any necessary loans within 18 months. ISG is also likely to go public and sell stock at some point in the future, allowing more investors to put their faith in turnaround expert W.L. Ross and his international steel group.

Mitch Hecht: I think what we’ve proving here, and demonstrating here is that, really basic industry in the U.S. today can be competitive, if we toward a structure that makes sense. And when all is said and done we will be globally competitive and even the cheapest imports coming from the cheapest country in the next year or so, won’t be a threat to us because we will actually have lower costs than those products from virtually any other country delivered to our shores, so when people talk about the death of the industrial base of the U.S., I think we’re gonna prove them wrong.

The purchase of Bethlehem still needs the approval of a bankruptcy judge, and in theory another bidder could step forward. However, ISG is probably locked-in as the only buyer because it has the support of the union. In Cleveland, Mike West, 90.3.

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