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Some deals are better avoided

The Baltimore Sun

Disingenuous and naive. That's the portrayal of Chicago's Bouchard brothers, the proto-Andrew Carnegies who almost bought the Sparrows Point steel mill, in a lawsuit stemming from the deal's collapse.

The Bouchards weren't merely less than candid with the media last fall, the lawsuit by then-Point owner ArcelorMittal suggests. They kept ArcelorMittal in the dark, tried to use its buyout partners to prop up another of their steel companies, and were foolish enough to formalize the arrangement before the deal closed - which ultimately doomed it, the suit says.

Maybe the Bouchards weren't really the Point's "best possible chance" to thrive and grow, as I wrote last year. Maybe the mill's ultimate sale to the Russian OAO Severstal, despite heartburn along the way, is the better outcome.

The complaint seeks $540 million for the alleged failure of the Bouchards' Esmark Inc. to honor a contract to buy the Point. As with any lawsuit, it gives only one side of the story, but it casts new light and makes a plausible case. ArcelorMittal hurt its credibility in Baltimore by starving the Point of capital, but its explanation for why the deal collapsed makes more sense than Esmark's.

When any buyout goes bust, the first suspects are always the lenders. Esmark was going to need $590 million in borrowed money to complete its $1.35 billion acquisition. As credit markets deteriorated last year, people kept asking if the loan was still good.

Craig Bouchard repeatedly said that it was. But the banks weren't the problem, as it turned out. According to ArcelorMittal's lawsuit and previous statements by the United Steelworkers union, Esmark's equity partners were the ones who pulled the plug.

They were hacked off about the Bouchards' plan to subsidize the hemorrhaging, Bouchard-controlled Wheeling-Pittsburgh steel operations with cheap slabs made at the Point, the lawsuit said.

One equity partner, Vale, a Brazilian mining company, declined to talk about who bailed. Another, mutual fund giant Franklin Templeton Investments, didn't respond by deadline. I couldn't reach anybody who spoke good English at a third, the Industrial Union of Donbass in the Ukraine.

Esmark spokesman Bill Keegan declined to answer detailed questions. In a written statement, Esmark calls the ArcelorMittal suit "without merit."

Esmark agreed to buy Sparrows Point in early August. It put up hardly any money, relying on its partners' deep pockets. Only a week later Wheeling-Pitt announced that it had negotiated "to purchase large volumes of slabs from Sparrows Point at below market prices" -- in other words, to slash the Point's profits to benefit somebody else.

What do you suppose the other Point investors thought of that? The supply agreement "was exactly the type of below-market, self-dealing transaction forbidden" by Esmark's contract with its equity partners, the lawsuit says.

If the Bouchards thought they could sweet talk everybody into going along, the time to do it was after the deal closed, not before. Didn't they think the Ukrainians read the papers?

Everybody expected the transaction to close early in the fall. In mid-November Craig Bouchard told The Sun things were still on track. On Dec. 7 he said that the equity investors were still committed but that "new partners" might be added. On Dec. 17 the deal was dead.

Esmark "deliberately concealed" its partners' second thoughts from ArcelorMittal, the lawsuit says. When ArcelorMittal confronted Esmark, "it finally admitted that there were problems with the equity financing and that it needed additional time to resolve those issues," the complaint says.

Esmark still blames the collapse on a dispute over retirement benefits between ArcelorMittal and the Steelworkers. But there isn't much evidence of this. Steelworkers Negotiation Committee Chairman David McCall didn't respond to phone messages. But whatever problems the union had with pensions seemed to get resolved easily enough when the Point was ultimately sold to Severstal.

The Bouchards were in over their heads. The $1.35 billion they agreed to pay for the Point was shown to be wildly exorbitant when Severstal got it months later for only $810 million. They got involved in a bidding war, the lawsuit shows, and had to raise their original offer from $1.1 billion.

Esmark's purchase of Wheeling-Pitt, completed in November, was such a disaster that the company is being forced to sell itself to India's Essar Steel Holdings. Esmark still hasn't completed its 2007 financial statements.

Even the Point's Steelworkers local expressed concern over the steel-slab supply agreement. If the Bouchards thought they could use Brazilian and Ukrainian capital to bail out Wheeling-Pitt, they were badly mistaken.

Esmark says it is "surprised" by ArcelorMittal's suit. I'm not sure I believe that either.

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