International Steel Group Inc. said yesterday that it is in the preliminary stages of examining Bethlehem Steel Corp. for a possible acquisition.
The two sides signed an agreement that gives ISG the exclusive right to perform due diligence at Bethlehem, the first step before buying a company. The agreement expires Jan. 6.
Bethlehem's plant in Burns Harbor, Ind., is "the newest integrated plant in North America and has always had a good reputation," Rodney Mott, chief executive of ISG, said in an interview. "And Sparrows Point is the only truly international plant of all the integrated plants in North America because it's on the coast, where it can bring in imported raw materials from around the world and penetrate markets around the world."
ISG was formed in March from the ashes of LTV Corp., a Cleveland-based steelmaker that filed for Chapter 11 bankruptcy protection in December 2000 and then shut down, throwing more than 10,000 out of work.
ISG, privately held by the New York investment business W.L. Ross & Co., was able to buy LTV's assets without also taking on its so-called legacy costs, chiefly health care for retirees and pension payments. ISG is producing steel at close to the level LTV was before it shut down and is doing so with about 3,000 unionized workers.
Bethlehem, which filed for Chapter 11 protection in October last year, has attracted several suitors, including U.S. Steel Corp. of Pittsburgh and Companhia Siderurgica Nacionale (CSN) of Brazil, but Bethlehem's legacy costs have stymied any attempt at consolidation.
When it filed for bankruptcy protection, Bethlehem listed $4.2 billion in assets and $6.75 billion in liabilities, including a health-care obligation of nearly $3 billion and a pension fund that underfunded by $1.85 billion.
The steelmaker said recently that its pension fund is short about $3.2 billion because of the decline in market value of the pension trust's assets. It lost $270 million in the first nine months of the year.
Bethlehem said it expects the federal Pension Benefit Guarantee Corp. to take over its pension plan in the next several months.
"Bethlehem will only move forward with ISG if there is value provided to Bethlehem that exceeds the value of remaining a stand-alone company," said Bethlehem spokeswoman Bette Kovach.
"And we fully expect to achieve whichever direction we go without a shutdown."
The acquisition could be good for ISG, but only under certain circumstances, said steel analyst Charles Bradford of Bradford Research in New York.
"If [ISG] can get a deal like they got with LTV, then [buying Bethlehem] makes imminent sense, but if they get anything less than that, it makes no sense," Bradford said.
"Nobody wants Bethlehem because of the legacy liabilities, and I can't see the union signing a contract without those legacy liabilities."
ISG and Bethlehem are each in the midst of contract negotiations, and each company is seeking more flexible work rules, performance-based wages, a pension plan that does not promise defined payouts and greatly reduced health-care obligations to retired workers.
Talks with Bethlehem are progressing well, although it's too early to have gotten to the most contentious issues, said John Cirri, president of United Steelworkers of America Local 9477, which represents Bethlehem workers in Baltimore.
Cirri said ISG has a fairly good relationship with the Steelworkers and that if being owned by ISG would mean Sparrows Point could remain in business, he's open to the idea.
"I'd be fine working for any company that protects our quality of work life," Cirri said. "But if it means dumping our pensions and the cutting of retiree health care, that's a hell of a lot to ask us to give up."