Beth Steel buyer, ISG, plans to raise $250 million in IPO

THE BALTIMORE SUN

International Steel Group Inc., which bought Bethlehem Steel Corp. in May, is hoping to raise $250 million in what could be the first initial public offering of a major domestic steelmaker in nearly a decade.

Cleveland-based ISG, the second-largest steelmaker in the country, plans to use proceeds from an IPO to pay down debt related to its $1.5 billion acquisition of Bethlehem, according to a filing with the Securities and Exchange Commission.

A date for the IPO has not been set. An ISG spokesman declined to comment yesterday while the Securities and Exchange Commission is reviewing the IPO filing.

Analysts said yesterday that ISG - which took ownership of the Sparrows Point steel mill in Baltimore County after acquiring Bethlehem Steel Corp. for $1.5 billion in May - is undertaking the stock offering against a backdrop of cautiously upbeat prospects for the long-troubled domestic steel industry.

"We are headed into a better environment for steel than we've seen in a long time," said Daniel A. Roling, a senior metals and mining analyst with Merrill Lynch Global Securities in New York City. "If there's ever a time to bring it public, this would be the time."

Thanks to steel tariffs enacted last year by the Bush administration, a weaker dollar and lowered domestic demand, steel imports - a major source of competition for U.S. mills - are down 20.4 percent to 11.9 million net tons through June this year, compared with the corresponding period last year, according to the American Iron and Steel Institute.

Prices for various steel products remained stable or declined only slightly, with softened demand among U.S. manufacturers, according to industry reports.

"This is pretty major," Leo Larkin, an equity metals analyst with Standard & Poor's in New York City, remarked about ISG's planned IPO.

The steel industry "is getting a little more interesting because of all the consolidation taking place," Larkin said.

The last major domestic maker of raw steel to hold an IPO - AK Steel Corp., a Middletown, Ohio-based steel maker - raised more than $700 million in 1994 as part of a combined equity and senior note offering.

But the domestic steel market worsened in the late 1990s. Since 1997, approximately 30 steel companies have filed for bankruptcy protection, and some have been absorbed by healthier rivals such as ISG and U.S. Steel Corp.

Larkin said that large institutional investors could be attracted to ISG's stock because of all the restructuring that the company - and the industry - has undergone recently.

The fact that Wilbur L. Ross Jr., a Wall Street financier with a reputation for buying, fixing and selling distressed companies, is behind ISG's rise will likely take a back seat to whatever value investors might see in a steel industry in the midst of consolidation, Larkin said.

"I doubt people will take [ISG's offering] on blind faith," Larkin said. "The industry has just disappointed too many people too many times."

Ross, ISG's chairman, bought the steelmaking facilities of LTV Corp. - once one of the largest domestic makers of raw steel - and formed ISG early last year.

The company then bought steelmaking assets of Acme Steel Corp. last fall, followed by the steel mills and other assets of Bethlehem in May, to become the second-largest steelmaker in the United States, with the capacity to make more than 18 million tons of steel products.

Goldman, Sachs & Co. and UBS Securities LLC, two major Wall Street financial firms, are the lead underwriters, according to a registration statement ISG filed Thursday with the Securities and Exchange Commission.

The registration filing gives potential investors the first public view into privately held ISG. As of June 28, ISG had cash of approximately $40 million and total debt of $835 million. It obtained around $700 million in financing for the Bethlehem acquisition.

After starting operations in the second quarter last year, ISG had net sales of $933.1 million and earned $69.6 million, the filing said.

In the first three months of this year - before its purchase of Bethlehem was complete - ISG had net sales of $461.7 million and lost $1.6 million, the filing said.

On a pro forma basis, which shows the combined performance of ISG and Bethlehem acquisition, ISG had net sales of $3.7 billion and net income of $169.7 million in 2002, the filing said.

On that same basis, ISG had $1.4 billion in sales and net income of $25.7 million in the first three months this year, the filing said.

The company's pro forma results were boosted after ISG's collective bargaining agreement, which lowered labor costs, was applied to Bethlehem's first-quarter results and 2002 results.

It was also helped by favorable accounting adjustments related to the depreciation of Bethlehem's property, plants and equipment that totaled more than $200 million last year and in this year's first quarter.

ISG also indicated in the filing that former Bethlehem facilities will face more work force reductions.

It said it had reduced Bethlehem's work force from 12,100 to 8,600 - a reduction of 3,500 jobs.

The company plans to lower the work force by another 500 positions over the next several months, the filing said. After the job cuts are complete, ISG said, it expects to employ 11,600.

Officials with the United Steelworkers of America, which represents ISG steelworkers, could not be reached yesterday for comment.

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