sparrows point sale scuttled

Recriminations Fly. Mittal Keeps Running the Mill.

© by Mark Reutter
Posted 12/20/07

UPDATE (April 30, 2008) – Parting the financial curtains to reveal their dire straits, the Bouchard brothers agreed to sell Esmark Inc. to an obscure Indian company, Essar Steel Holding Ltd., at the fire-sale price of $669 million. The transaction was in cash, no doubt demanded by Esmark’s enraged investors.

Thanks to the brothers’ overexpansion and poor management, another venerable U.S. steelmaker, Wheeling Pitt, with plants in and around Steubenville, Ohio, and Wheeling, W.Va., will now pass to foreign owners.

Or maybe not…

SECOND UPDATE (May 8, 2008) – To assuage his hurt feelings over a matter of $540 million (the difference between Esmark’s bid for Sparrows Point last year and the price that Severstal just paid for the mill) and possibly to scotch Esmark’s own sale, Lakshmi Mittal sued the Bouchard brothers in the Supreme Court of New York. ArcelorMittal charged that Esmark Inc. and E2 Acquisition Corp., both vehicles of the Bouchard-brothers-led bid, breached an August 1, 2007, contract to purchase the Point for $1.35 billion. ArcelorMittal asks for “in excess of $540 million” for the alleged breach by Esmark.

Esmark called the suit frivolous and without merit, but the suit holds a potential dagger over the company’s sale to Essar.

What seemed like a fairy-tale ending – the return of Sparrows Point to American ownership, with pledges of job creation and long-delayed investment at the mill – has become an embarrassing muddle.

The putative knights in shining armor, Craig and James Bouchard, come to rescue the mill from the clutches of Lakshmi Mittal, were badly tarnished by the December 17 announcement that Mittal Steel (now ArcelorMittal) had cancelled its agreement to sell Sparrows Point.

Finger pointing began immediately. ArcelorMittal blamed the sale’s demise on the brothers’ failure to come up with the money ($1.35 billion), while Craig Bouchard and two officials from the United Steelworkers Union, David McCall and John Cirri, blamed ArcelorMittal for not negotiating a prior health-benefits settlement with the USWA. Meanwhile, Companhia Vale do Rio Doce (CVRD), the Brazilian iron-ore miner that agreed to put up the lion’s share of the purchase price, withdrew from the Bouchard syndicate.

What’s going on? At the very least, the Bouchard brothers failed to live up to their assurances of the syndicate’s financial strength, while the U.S. trustee appointed to oversee the sale, Joseph G. Krauss, appears to have been caught unprepared as the deal unraveled.

The bottom line: Lakshmi Mittal still owns and operates Sparrows Point – which the mogul has resisted giving up all along – while the U.S. Department of Justice, which ordered the sale last February on anti-trust grounds, has egg on its face.

Back on August 2, Esmark, Inc., a Chicago metal distributor run by Craig and James Bouchard, won DOJ approval to buy Sparrows Point from Mittal.

The sale was officially aimed at resolving anti-trust issues related to Mittal’s pending takeover of Arcelor Steel, which would give the company dominance over the steel tin market. But the forced sale was widely interpreted as a rebuke to Mittal’s poor record of investment and management since it acquired International Steel Group in 2005.

DOJ had originally demanded that Mittal sell Sparrows Point by May 20, 2007, but various extensions were granted to Mittal, whose foot dragging was readily apparent to insiders.

The sale to Esmark was viewed by many observers (including this writer) as a way to return steel production to progressive management. Hard-pressed workers, who had seen thousands of jobs evaporate over the last decade, welcomed the sale. 

The sale did raise concern that the Bouchards were untested as steelmakers. But those concerns were allayed by the appointment of John Goodwin as CEO and day-to-day manager of Wheeling-Pitt, a company acquired by Esmark.

Goodwin, a highly respected former U.S. Steel manager, was pegged as part of the management team that would oversee the integration of Sparrows Point and Wheeling-Pitt into a strong company.

Esmark brought two partners into the sale. CVRD of Brazil, would supply iron ore to Sparrows Point and invest up to $270 million in the sale, and Industrial Union of Donbass (IUD), a Ukrainian steel producer, would add equity and technical strength to the new Sparrows Point company.

In a conference call on August 10 with analysts, Craig Bouchard gave a description of the Sparrows Point deal. The following comes from the transcript and is quoted at length to provide information that was not widely known at the time:

CRAIG BOUCHARD: Let me go over to Sparrows Point, and then I won’t take too much more time here. I get a bunch of questions there, but the first one is, how did you pull this off? There were between 10 and 14 bidders for the company. They were all global, first-class players in the steel marketplace. Most of them were large foreign players. There were a couple of Americans in there trying, the process unfolded over a long period of time. There was an RFP [Request for Proposal] out of the – amongst the global steel industry players. That process was diligent, it was thorough. Mittal explored each and every opportunity to get the best deal for its company and to get somebody in there that would be a competitive player in the U.S. tin market. And we went in there and slugged away and we tried to win that company.

Esmark and Wheeling-Pitt both were involved in the foundation of the company, E2 Acquisition Corp. In fact, at the beginning Wheeling-Pitt and Esmark opened all of it when it was a shell. And then we went into the marketplace to find the strategic players that we felt could build a very strong company for E2, but also in its partnerships with Wheeling-Pitt and with Esmark. In the steel market today, raw materials is the name of the game, and we went out and found that we think is the best raw materials company in the world, and that’s CVRD. They participated in a major way in the company. They have announced a $270 million equity purchase in the new company. They are not the majority shareholder in the new company. There are no majority shareholders.

Secondly, we went to a company that we’ve had a very strong and good relationship with. We announced earlier in the year, going – IUD Donbass as the – with the non-binding letter-of-intent supplier of slabs to Wheeling-Pitt. Jim and I met with them many times in recent times, and they had a very strong interest in a strategic relationship with our company. They came in with a major equity investment in the new Sparrows Point company.

Thirdly, as you know, Franklin Mutual Shares LLC is the largest investor in Esmark, a controlling investor in Esmark and one of the strongest supporters anybody has ever had out there as we built our company. They have come in with a major investment in the Sparrows Point acquisition. There are other parties involved, although not many. Durham Capital is an excellent institutional investor participated. And I personally participated in taking what, for me, is a significant equity investment in the new Sparrows Point company.

A couple of points on structure because I’ve had a lot of questions about this. The total equity investment in the new Sparrows Point company, E2 Acquisition Corp, is $790.5 million. Long-term debt raised by institutional investors is $365 million. We put in place a $475 million ABL short-term working capital facility, of which we will borrow roughly $225 million at close, which leaves the majority of that facility un-borrowed and available for funding the growth of the company. We will make a number of strategic improvements to Sparrows Point now that is has become such an important piece of our whole picture. I won’t go into those today, but I’d be happy to entertain anybody that wants to come and visit and take a look at our new investment.

Craig Bouchard went on to assure analysts that the unfolding credit crisis on Wall Street would not affect the Sparrows Point sale. Again from the transcript:

Now to the current crisis on Wall Street, which relates to difficulties that started in the sub-prime market, straight into the equity and credit markets. And I know that many of our institutional investors are struggling with issues there.

Everybody knows, as well that there have been a lot of deals on Wall Street, that have not been funded and have been delayed because of credit overhang with the major banks and financial institutions.

Sparrows Point was funded by banks and large institutional investors on the credit side with no financing syndication contingencies. Our deal will close rapidly upon approval by the DOJ and the trustee that’s been appointed. There is no syndication risk whatsoever. I have been told by numerous parties on Wall Street that we are the only major transaction completed since July 10 with absolutely no syndication risk… It is one of the great steel transactions of this decade in my opinion.

In terms of long-term development of Sparrows Point, Bouchard had this to say:

Wheeling-Pitt needs slabs. Sparrows Point is running at a less than full-capacity utilization. It is to the benefit of both companies to run at high levels of capacity utilization because it lowers the cost structure of both companies. We are going to accomplish that nearly overnight upon closing of the Sparrows Point deal, and there is a sharing of those great benefits of lowering a cost structure, and that sharing is reflected in the price of slabs which is less than the current global market price. It’s that simple. So it’s something that both companies are going to prosper from. The volume of slabs will make Wheeling-Pitt the single largest customer of Sparrows Point literally overnight And it, obviously, as we talked about slabs and their important to the hot-strip mill at Wheeling-Pitt, it’s very important at Wheeling-Pitt.

So with that, although the credit markets are swirling, and the equity markets are swirling, and I know you guys have got some problems with your investments out there, we’re all sitting in this room, excited as can be about our future. We’ve got our plan.

Craig Bouchard continued to give upbeat assessments of the purchase in speeches and media statements before an eerie silence descended in October. That silence was broken by an SEC filing on November 6 revealing that Wheeling-Pitt had lost $56.3 million in the third quarter of 2007. What’s more, John Goodwin was no longer Wheeling-Pitt’s CEO. He had been replaced by James Bouchard.

A week later, Craig Bouchard assured The Baltimore Sun that the Sparrows Point sale was “on track” and nearing completion. When the closing date of November 30 was missed, Craig Bouchard told The Sun that the deal was hung up by ArcelorMittal’s inability to reach an agreement with the USWA to pay retiree benefits.

But that issue was a sideshow to the overwhelming problem at hand – CVRD had withdrawn from the syndicate, leaving E2 Acquisition shorthanded. (It was later disclosed that the Bouchards had only put up about 2 percent of the purchase price.)

While the E2 group scrambled for new deep pockets, ArcelorMittal pulled the plug. On December 17, the conglomerate e-mailed a statement from its Luxembourg headquarters that the agreement was terminated “due to E2’s inability to secure financing.” The press release further said that Trustee Krauss had concurred in the decision, though his role in the negotiations has yet to be described.

Responding with its own e-mail, a DOJ spokesperson gamely stated that “other capable buyers are interested in acquiring this important asset, and the trustee appointed by the court will continue to have the authority to consummate a sale of the Sparrows Point mill to a buyer approved by the department.”

Craig Bouchard claims that his group will be one of those new bidders. “The buyer of Sparrows Point needs to find a structure which satisfies Mittal, the trustee and the United Steelworkers,” he wrote in another e-mail. “We have been encouraged by the trustee and the USWA to stay active in the process. Therefore, we will do so. We will work with the United Steelworkers for their support and approval of a new transaction.”

Given their battered history, it seems unlikely that the brothers will have much credibility left to mount a new bid. In fact, the financial fate of Wheeling-Pitt now seems up in the air. The company is expected to lay off 300 or more workers to staunch losses.

And given how little ArcelorMittal has placed in new investment at Sparrows Point, the military acronym snafu (“Situation normal, all fucked up”) characterizes the latest chapter of the mill’s ongoing plight.