How to Pocket $267 Million
© by Mark Reutter
4/06 and 9/05, originally posted 2/05
New York Social Diary
Ross courts steelworkers before his 2003 buyout of
Bethlehem Steel (above) and escorts his latest
domestic acquisition, Hilary Geary, to their wedding
reception last fall.
On the morning of Monday, October 25, 2004, the business media
was abuzz with news that Ross had struck a deal with Indian mogul
Lakshmi Mittal to sell International Steel Group (ISG) for $4.5
billion. Shares of ISG immediately jumped, so that by the end of
the day, Ross and other ISG shareholders were $545 million richer
than they had been when the stock market closed on Friday.
“We had an immediate love affair,” Ross said in a conference
call announcing his shotgun wedding to Mittal, nullifying his earlier
statements that he was not an “asset flipper” and had
invested in the steel industry for the long haul.
When the dust settled, Ross cashed out with $267 million in stock
profits from his 6,936,988 shares of ISG stock. He took half in
cash and half in Mittal Steel stock when the transaction was completed
on April 13, 2005.
The announcement ended a period of great activity by the New York
financier. As early as June 2004, following a successful IPO (Initial
Public Offering) that turned ISG into a public company traded on
the New York Stock Exchange, his private equity firm, W.L. Ross & Co.
LLC, began selling its 32.9 percent stake in ISG. These transactions
were done through two funds, WLR Recovery Fund LP and WLR Recovery
Fund II LP.
Ross & Co. had paid an average of $3.42 for each share when
the company was private, but sold the shares to institutional investors
at between $25 and $35 each (the price range of ISG stock on the
New York Exchange). These sales netted Ross at least $800 million
in profits even before his big score in October.
Now consider those
who were left behind during Ross’s whirlwind romance with
the steel industry. They total about 150,000 Americans, all of
them old, quite a few of them sick, and all of them poorer than
they had ever imagined they would be when they retired after collectively
serving some 4.5 million years around the heat and soot of furnaces.
About 95,000 retirees of defunct Bethlehem Steel, for example,
collectively lost $380 million in health-care benefits between
March 31, 2003, when those benefits were terminated by Judge Burton
Lifland of U.S. Bankruptcy Court, and October 25, 2004, when Ross
agreed to sell the former Bethlehem assets to Mittal.
Over the same time span, the federal Pension Benefit Guaranty Corp.
paid out roughly $500 million to maintain a reduced level of pension
benefits for ex-Bethlehem retirees. Roughly $200 million more in
PBGC funds went out to 40,000 retirees at LTV and the 10,000 retirees
at Weirton Steel, which also shed their “legacy costs” before
they were bought out of Chapter 11 bankruptcy by Ross’s ISG.
In back-of-the-envelope terms, about 145,000 Americans and the
PBGC had absorbed about $1.1 billion in losses arising from Wilbur
Ross’s “rescue” of the bankrupt steel companies,
whose final days are recounted in (new) Chapter 23 of Making Steel.
Compare their loss to
$267 million to Ross
from selling to Mittal
$800 million to Ross recovery funds from selling ISG stock
to institutional investors
$118 million to Rodney Mott, president of ISG, and other top
Total: $1.185 billion
In other words, Ross
did not restructure Beth Steel or the other companies by investing
in new technology or seeking out
new markets. Rather, he kept
running, gaining the workers’ goodwill and maintaining customer
relationships, and then diverted the cash flow from the working class
to the investment class.
Here’s how you do it in five easy steps:
Step 1: Offer to buy the physical assets
of a bankrupt company at a fraction of its book value;
Step 2: Arrange to be released from paying “lifetime” employee
benefits that the bankrupt company had promised (if you have enough
chutzpah, and Ross
did, express anger that the prior employer did not continue to pay
retiree benefits without mentioning that your stingy bankruptcy offer
was a major reason
Step 3: Form a private company to collect the
assets and issue stock to yourself and your partners at a big
Step 4: Tout your company as a comeback story and sell the stock
publicly at a big markup. (This process is generally known as “unlocking the value
Step 5: Stand ready to hand off the company (nominally public,
but totally under your thumb) to the highest bidder, saying that
your “restructuring” is
Let’s not forget the role of the United Steelworkers of America
in this sleight of hand. USWA President Leo W. Gerard was putty
palm. He sold his workforce on the financier’s commitment
to turning around steel, while not insisting that the retirees
share directly and concretely in any future “upside” of
the new company.
But then again, the union’s actions may not be so inexplicable:
Retirees do not pay dues to the USWA, but active steelworkers do.
Even after Ross sold
out the active workers by cashing out to Mittal, Gerard
was still blowing smoke about the proceedings, telling U.S.News & World
Report, “The union
and Wilbur Ross were the catalyst that not only saved steel
jobs, but saved the industry.” Go tell that to the retirees.
if Bethlehem Steel had held out a little longer, it could
have returned to profitability.
steel prices increasing to $750 a ton last year,
just about anyone who could make a
pound of steel could make a buck. (Even after paying
full pensions and health benefits to its retirees, U.S.
earnings last year
of $1.08 billion.)
Ross’s successful attack on the claims of active
and retired employees would not have been possible
without the assistance of the
officers and directors
of the former steel companies.
Among those on the board of directors of Bethlehem
Steel Corp. who unanimously approved the “asset
purchase agreement” with ISG in 2003 that
led to the termination of retiree health-care benefits
were a former U.S. attorney general (Benjamin R.
Civiletti); an ex-Columbia University law professor
who practiced corporate law for the international
law firm, Davis, Polk & Wardwell (Lewis B.
Kaden); a former president of a major liberal arts
college (Shirley D. Peterson, president of Hood
College from 1995-2000), and a self-described “corporate
recovery specialist” (Robert Steve Miller,
CEO of Beth Steel). (1)
Former director Kaden deserves special attention. After napping
for 10 years as a Beth board director, Kaden was instrumental in
hiring Robert Steve Miller as the last CEO of Beth Steel, who set
in motion the asset sale to ISG, which Kaden approved as a board
member. Since then, Kaden has done very well for himself. He now
sits as one of only two U.S. directors of Mittal Steel Co. – the
other being Wilbur Ross.
On September 4, 2005, Kaden left Davis, Polk & Wardwell
to become vice chairman and chief administrator officer of Citigroup,
the world’s biggest bank, reporting directly to CEO Charles
Prince. On March 24, 2006, Citigroup led a syndicate that loaned
five billion Euros to Mittal Steel to cover the cash portion of
its hostile bid for Arcelor Steel. Kaden’s position in the
highest reaches of Wall Street make his $79,000 remuneration (in
2005) from Mittal a true bargain. But it also helps feed a lot
of business to his new employer.(2)
The depredations of steel
management have certainly not gone undetected among those who
try to keep the mills
As one concerned
me: “Wilbur Ross
pulled off one of the greatest self-serving atrocities the business
community has ever seen. It has been a mystery
to me that a government,
especially the U.S. government, can be so passive
with regard to the give-away of a vital industry.”
But don’t expect to read this kind of observation
in the business press. With its narrow-minded focus
on earnings and investor returns, the press has
turned Ross into a corporate miracle worker. Business
Week struck a Churchillian
note in a Dec. 22, 2003 cover article that lauded
Ross not only for rescuing steel, but for his defense
American industry (“he’s down in Washington
every week to argue his view on trade and the need to protect American jobs”).
A hero? Wilbur Ross? Yes, The Economist proclaimed
(“Americans have toasted
Mr. Ross as the savior of their steel industry”),
a view seconded by Fortune (“a latter-day Andrew Carnegie”)
and the Washington
is a testament to the self-correcting nature of the U.S. economy that there are
a few well-funded Wilbur Rosses around”).
In the strangely uniform eyes of major press outlets,
glimmers of a more complicated story line are quickly
by business platitudes.
days before Ross sold ISG, the Chicago Tribune’s James
P. Miller was hailing him for his dedication to the
sector, writing, “Over the past few years,
Ross’s steel investments have had such a dramatic
impact that many observers no longer perceive him
as just another vulture investor
but instead see a pioneering
figure who helped revive and rationalize a failing
Exactly who are the “many observers” cited?
They are Wall Street analysts and academic experts
dependent on pleasing
the CEOs and industries they
cover (3) – along with
Ross himself, whose gift for spin befits a man who
when he was a student at Yale.
What honestly can be said about Wilbur Louis Ross is
that he took a troubled business, shook it hard, and
fruit. No distractions kept
him from extracting maximum value from his assets; no
balancing of his financial interests against the sacrifices
many others. Just knife-blade bargaining
and cutting-edge execution.
Or as Ross said in a speech before the American Iron
and Steel Institute, “The
building blocks [of ISG] are drastically reduced personnel costs, performance-based
incentive plans, and innovative measures aimed at realizing great production
efficiencies.” Those words were delivered back in 2003 when he was still
taking bows as “chairman of a huge company in a vital industry.” It’s
amazing how quickly he gave up his lady when Mittal came a-wooing – in
a New York minute, one could say.
The sale of ISG capped a busy month
for the 66-year- old (he was born on Nov.
28, 1937). Just three weeks before he tied
the knot with Mittal, he wed blonde society
hostess Hilary Geary, 54.
The marriage (the third try for both) followed
his brief union with Betsy McCaughey while
she was lieutenant
News of their
marriage, and separation, all within McCaughey’s
four-year term, made the papers on a regular
New York Times planted a reporter
Room at Rockefeller Center as fellow billionaires
and other members of the Manhattan gentry gathered
songs of Bobby Short
(who died soon
Oct. 13, 2004. An excerpt:
The crowd, which included
Carl C. Icahn, Georgette Mosbacher and Arnold Scaasi, topped
off a dinner of lobster and filet
mignon with banana
is in the details,” said the bride, who rented ice
cream parlor dishes for their authenticity.
Mosbacher, CEO of
the Borghese beauty company and Republican Party fundraiser,
gave a toast that suggested how Hilary
will help the groom
in his riches, saying, “When men are as accomplished as Mr. Ross, and have built
what he’s built, they don’t have a
lot of time to enjoy it. Hilary will open his eyes
to that life, to the glamour. She rounds
his life out.”
Having acquired a partner suitable for the society pages,
Ross has turned his attention to repeating his success
in steel in
other troubled industries.
International Coal Group (ICG) is a knock-off of
ISG, formed by Ross & Co.
to buy bankrupt assets of coal companies. His biggest
catch so far is Horizon Natural Resources, which
operates surface and underground
mines in Kentucky,
West Virginia, Indiana, and Illinois.
As he did with Beth and other steel companies,
Ross first legally discarded the “baggage” that
weighed down the assets. Before he bought Horizon in partnership with A.T. Massey
Coal Co., the bankruptcy courtroom of Judge William Howard obligingly eliminated
the health-care benefits for 3,800 retired Horizon miners and their widows. (The
Pension Benefit Guaranty Corp. had already assumed responsibility for Horizon’s
Ross also purchased Anker Coal and
CoalQuest Development, which own extensive reserves in the Lower Kittanning seam
of coal near Grafton, W.Va. (once a major
source of metallurgical coal for Sparrows Point). Hoping to repeat his success
in steel, Ross has filed his intention to float a $250 million coal IPO through
UBS Securities and Lehman Brothers. With energy prices rising, Ross has been
angling for a position in UK Coal, Europe’s biggest coal mining outfit,
with 12 deep and surface mines in central and northern England.
A second venture launched by Ross is International Textile Group (ITG), which
controls the assets of bankrupt textile makers Cone Mills and Burlington Industries.
ITG has entered into joint ventures in Mexico, Guatemala, Turkey, and India,
purchased Canadian worsted producer Cleyn & Tinker, and reached an agreement
with a Chinese clothing chain to sell apparel to China’s middle class.
befits a man of wealth and taste, Ross collects art, summers
in Southampton, and sits on a bevy of prestigious boards. He
is former chairman of the Smithsonian National Board and the
Parrish Art Museum. Through his wife, he has become active with
the Boys Club of New York and Central Park Conservancy. He was
appointed by former President Bill Clinton to the Board of the
U.S.-Russia Investment Fund and served as privatization adviser
to New York City’s former Mayor Rudolph
He is a member of the Yale School of Management Board of Advisors
(joining Rupert Murdoch’s Yale MBA wife, Wendy Deng Murdoch), the Business Round Table,
and the Turnaround Management Association. He is a popular speaker, recently
addressing students and faculty at Columbia University’s Graduate School
of Business and slated to appear at the Fall 2005 Private Equity Analyst Conference
sponsored by Dow Jones & Co., publisher of the Wall Street
He and his equity company have won multiple awards and hosannas.
In 1999, President Kim Dae Jung awarded Ross a medal for his help
during Korea’s 1998 financial
crisis. In 2002, Buyouts Magazine awarded his firm the Public-to-Private Deal
of the Year award as well as the Middle-Market Deal of the Year award. Mergers & Acquisitions
Advisor awarded the firm the Boutique Middle Market Private Equity
Firm Award in 2002.
1. For the record, other
members of the Bethlehem Steel board who signed off on the ISG sale were Worley
H. Clark, former president and CEO of Nalco Chemical; John B.
Curcio, retired chairman and CEO of Mack Trucks; Harry P. Kamen,
retired chairman and CEO of Metropolitan Life Insurance; William M. Landuyt,
chairman and CEO of Millennium Chemicals; and John F. Ruffle, former chairman
of J.P. Morgan & Co. The
two top financial officers at Bethlehem Steel were appointed to the same
management positions at ISG after the Bethlehem asset sale. They were Leonard
M. Anthony, Bethlehem senior vice president and principal financial officer,
and Lonnie A. Arnett, Bethlehem vice president and principal accounting officer.
2. Mittal Steel
Co. website, Company/Management/Board of Directors; “Lewis B. Kaden
to Join Citigroup as Chief Administrative Officer,” Citigroup
press release, June 15, 2005; “Mittal Steel Files Documents
with SEC on Arcelor Takeover Bid,” Reuters, March 24, 2006.
In December 2005, Citigroup loaned Mittal Steel $3.5 billion
to help pay for its purchase of the Ukrainian steelmaker Kryvorizhstal.
3. Among the most frequently quoted experts
is Professor Peter Morici at the University of Maryland, who has
served as a researcher and paper-writer for the American Iron and
Steel Institute and Steel Manufacturers Association, a fact rarely
disclosed in media reports.
Transcript of “Kudlow & Cramer,” the
nightly business talk show on CNBC, following Ross’s
announcement of the sale of ISG to Mittal:
JIM CRAMER: Pay attention. Learn something.
You are about to see a man who makes a lot of money being
smart. And you can do it, too, if you just listen to him.
This is Wilbur Ross, who I’m thrilled to have on the
show, as so is Larry. He just made a fortune buying and selling
assets that nobody really wanted. He’s the chairman
and CEO of W.L. Ross & Co.
I’ve got to tell you, congratulations, sir. This is one
of the great things I have ever seen done. Can you just tell
our viewers who may not be familiar with you what you bought
when no one else wanted …
WILBUR ROSS: Right.
CRAMER: … and what you just sold?
ROSS: Well, we bought a collection of bankrupt
steel companies, LTV, Bethlehem, Weirton, Acme, and Georgetown.
And amazingly, we were about the only bidder on each of those
KUDLOW: The rest of the story is brilliant,
ROSS: Right. You bet.
KUDLOW: You just have to reorganize and
ROSS: Right …
CRAMER: All right. Now one of the things
that happened here that I found so fascinating is that you
could look at this glass half-full, half-empty. I’m
sure there are people out there saying, “You know something,
I didn’t – I worked at those places all my life,
I didn’t make a dime, I got laid off” … See,
this capitalism, capitalism is not a foolish game …
KUDLOW: Great. Wilbur Ross, miracle worker.
Miracle worker. There you are.
CRAMER: All right. Well, next, the CEO
of Scotts, shampoo and conditioner for your lawn.