Tuesday, February 24, 2004

Steel group's discount plan: Buy bankrupt, then cut costs

By Connie Mabin
The Associated Press

CLEVELAND - Like a seasoned shopper digging through clearance bins, International Steel Group Inc. has made bargain hunting a way of life.

In business for just two years, the company has catapulted to the top of the industry by buying bankrupt steel makers at bargain prices, cutting costs including retirees' pensions and reinventing the companies so they can produce more steel cheaper than almost anyone else in the United States.

LTV. Acme. Bethlehem. The former steel giants have all been bought up by Cleveland-based ISG.

ISG has been criticized by some investors for taking on heavy debt and questioned by some analysts who are skeptical that its cost-cutting plan will work at plants many consider not worth saving. But overall, ISG has gotten a positive response.

"ISG has been pretty successful, more successful than any time in the past," said Mary Beth Deily, an associate professor of economics at Lehigh University who follows the industry.

ISG has succeeded at "dealing with the union and getting everybody on board and moving ahead and getting the workers to kind of buy into what sacrifices they have to make to keep this capacity running," Deily said.

Certainly, it convinced bankrupt Weirton Steel Corp., which was gasping for its last independent breaths when ISG swooped in last week with a $255 million buyout offer.

Weirton Steel, the small company across the Ohio River in West Virginia, had fought fiercely for years to stand on its own. It was once the largest American company wholly owned by its workers, although that ownership has since dwindled to about 21 percent.

"Without question," Weirton union president Mark Glyptis said of ISG's offer, "I view this as a godsend."

Glyptis, who heads the 2,700-member Independent Steelworkers Union, knows that if the sale is approved by a bankruptcy court, Weirton will follow the ISG model, shedding costs through job cuts and benefit reductions for retirees.

Workers and company officials realized that there was no other way to survive when a long-running foreign import crisis results in bankruptcies and shutdowns.

The deal makes sense for ISG, too, said Michael Locker, a New York steel analyst. He said ISG would acquire one of the nation's largest tin-plate mills, continue to gain market share, and seize more control of steel prices.

"It makes them a leader," Locker said.

Still, some analysts doubt that ISG can afford to keep a promise to keep most of Weirton's operations open long-term because of problems getting raw materials and long-standing inefficiencies that may be beyond repair.

Charles Bradford of Bradford Research/Soleil Securities Corp. says Weirton is in an undesirable geographic location because it's far from the Great Lakes region, where ore is mined.

"Weirton has to put it on a train and ship it, and that adds to its costs," he said. "This is basically a mill that should have closed decades ago."

Locker also is skeptical ISG will keep open all of Weirton's operations mainly because of the continuing worldwide coke shortage. Coke is the residue of coal left after destructive distillation and used as fuel. Weirton, which uses 1.2 million tons of coke annually in iron making, already had to idle one of its two blast furnaces because of the shortage.

An infant in an industry that dates to the 1800s, ISG could have the capacity to become the country's top producer of integrated steel - or steel made from raw materials - supplanting U.S. Steel.

Analysts say they'll be watching to see how much new debt ISG takes on once the Weirton deal is completed. ISG recently paid down a big chunk of its $750 million in debt with proceeds from its $462 million December initial stock offering, silencing critics who were concerned about the pace with which ISG was taking on fixer-uppers.

The deal "is not the greatest," Bradford said, but added, "There can be some value. This is not a stupid move."

New approach

Analysts say ISG has succeeded so far by bucking a tradition of continual steel output. Instead, ISG pulls back production when demand drops, preventing an abundance of product that pushes prices lower.

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