If an effort to sell itself to a rival company unravels, Bethlehem Steel Corp. faces an uphill battle to emerge from bankruptcy either as an independent entity or in combination with another steelmaker, industry experts said.
Officials at Bethlehem and its suitor, International Steel Group Inc., said they're dealing with the fallout of the federal government's termination last week of Bethlehem's pension plan, which they say caught them by surprise. The companies and the United Steelworkers of America had expected the Pension Benefit Guaranty Corp. to terminate the pension plan next year, but the agency ended it Dec. 18.
The PBGC move to protect pensions of 95,000 workers and retirees squelched the deal-makers' plan to use early-retirement packages to trim Bethlehem's 12,000-member work force, and that was a possibly fatal blow to the sale of Bethlehem's assets to ISG, officials from both companies said. Bethlehem, operating under bankruptcy protection since October last year, said it was reserving the option of a court challenge, but that would take months to resolve. Meanwhile, the clock is ticking on a 60-day exclusive exploration agreement between Bethlehem and ISG that expires Jan. 6.
The two had been trying to reach an agreement that would have given ISG Bethlehem's plants, including its Sparrows Point mill in Baltimore County, a reduced labor force and a new union contract - but without the burden of Bethlehem's pension and health care costs. Early retirements, which would have pared more expensive senior workers, were a critical component in accomplishing those goals, the companies said.
Robert S. "Steve" Miller Jr., Bethlehem chairman and chief executive, said PBGC's move "may have changed the mix of how we'll go about downsizing the work force." Though Miller didn't provide a number, he and the union agree that a couple of thousand jobs - salaried and union - could be affected.
Wilbur L. Ross Jr., chairman of Cleveland-based ISG, said efforts to cut workers without early retirements could produce scenarios that would kill a deal.
"One would be if we can't reach a satisfactory resolution with the union," Ross said. The other is if "there's not enough [assets] left over to make [a deal] worthwhile for the creditors."
Under its contract with the United Steelworkers of America, Bethlehem cannot permanently reduce its hourly labor force without union agreement. The contract is outside the domain of the U.S. Bankruptcy Court.
If a sale to ISG falls through, Bethlehem still must reduce its work force, negotiate more flexible job rules and resolve its retiree health care obligations, which totaled $371 million last year, industry experts said
"If Bethlehem wants to survive, my guess is that at least a third of the people have to go," said Charles Bradford, a steel industry analyst with Bradford Research in New York.
Mary E. Deily, an associate professor of economics at Lehigh University in the steelmaker's hometown of Bethlehem, Pa., said that a scuttled deal increases Bethlehem's chances of liquidation unless it can work out an agreement with the union.
"I would say their chances of doing it as a stand-alone really depend on it being able to renegotiate their [union] contracts," Deily said.
The union has been working with Bethlehem to figure out employee levels for an independent or merged company, said Tom Conway, a union spokesman.
"We're looking at the steel mills job by job, work function by work function, and trying to determine the most efficient, cost-effective way of getting the work done," he said.
Conway said he believes that a deal with ISG deal is possible.
"We expect that they will make an offer," which will be evaluated also by the union and Bethlehem's creditors, he said.
"We believe the consolidation of the steel industry is the best thing for our workers and families," Conway said. "But we're not wed to consolidation at any cost, and we're not going to cut our own throats to see it come about."
Some analysts said that Bethlehem could emerge without the backing of ISG, which is one of the healthier steel companies in the country, formed from the ashes of another bankrupt steelmaker, LTV Corp., this year.
In the quarter that ended Sept. 30, Bethlehem's net loss shrank to $64 million from $162.4 million in the corresponding period last year. The company's cash position also improved to $86.3 million at the end of this year's third quarter compared with $50.4 million at the similar time last year.
Most experts agree that there is a long-term future for Sparrows Point, which employs 3,300, and Burns Harbor, Ind. - the company's two biggest plants.
"I don't think the deal [with ISG] is going to happen right now," said Michael Gambardella, a steel industry analyst with J.P. Morgan Securities in New York. "I think the process will probably be that the company reorganizes and emerges from bankruptcy and then is consolidated with one or more of the domestic players that's already gone through this process."
Most agree that liquidation - which would likely involve a full or partial shutdown of Bethlehem's plant - would be the most difficult to recover from.
The cost of restarting a plant can run into tens of millions of dollars. And a company that acquires any liquidated assets also may have to trim prices to recapture a plant's clients who went shopping for steel at other companies after a closure, analysts said.
Rodney Mott, ISG president and chief executive, said that one of Bethlehem's "strongest assets is their order book and their relationships with their customers," which include automobile makers.
"So by going through a liquidation and a shutdown, you don't pick up any of the customers or any of the orders that they have," Mott said.
An attorney who represents one of Bethlehem's largest creditors said he thought a Bethlehem liquidation is unlikely.
"I don't think you'll see creditors throw up their hands and demand liquidation," said the attorney, who spoke on the condition of anonymity. "There will be very, very strong efforts to reorganize. There's not going to be an auction sale of the assets. It's highly unlikely. Does that mean there's still an opportunity to buy it? Of course there is, and that may be the solution."
Ross, ISG's chairman, said Bethlehem would be stronger if it consolidated with his company, with its essentially debt-free balance sheet.
Said Ross: "All the costs of doing everything are much more severe for Bethlehem alone than merged."