Bullish on Bankruptcy
Wilbur L. Ross is spreading out pie charts and bar graphs on a conference table in his midtown Manhattan office. Usually a mild-mannered, pinstripes type, he's bouncing up and down as he points out the exploding numbers of U.S. bankruptcies. "It's like a bad hangover after a crazy New Year's Eve party," he says.
These are fat times for a self-described "contrarian's contrarian," who has also been called the King of Bankruptcy. The private equity firm he started two years ago, W.L. Ross & Co., specializes in buying troubled companies to turn them around and pocket a hefty profit. In 24 years at Rothschild Inc., the investment bank, he worked on some of the largest and ugliest bankruptcies in U.S. history, from Texaco and Continental Airlines to TWA and Drexel Burnham Lambert--and defeated formidable foes such as Carl Icahn, Donald Trump, and T. Boone Pickens.
But his latest deal, the $325 million acquisition of LTV Corp., the bankrupt steel company in Cleveland, is raising eyebrows. "It's a big gamble," says Michael F. Gambardella, metals analyst with J.P. Morgan Chase & Co. "The common wisdom is to let these steel companies go out of existence--the survivors will pick up the pieces," says Robert M. Miller, president of the restructuring unit of Financo Inc., an investment bank. Since 1998, cheap imports have driven nearly three dozen U.S. steel companies--almost half the industry--into bankruptcy.
Still, Ross's timing looks uncanny: He bought the steel assets of LTV, once the nation's fourth-largest manufacturer, on Feb. 28, less than a week before President Bush slapped a 30% tariff on most steel imports, crimping LTV's foreign competitors. And he bought it for a song. The going price for mills is around $200 per ton of annual capacity; Ross paid $11 per ton.
Ever the opportunist, Ross, 64, spent most of his time during the Asian financial crisis in Japan, where he bought an ailing bank, and in South Korea, where he acquired an insurance company, among other things. But with record numbers of U.S. bankruptcies, he's seeing loads of opportunity at home these days, especially in downtrodden, Old Economy industries such as metals and textiles.
Ross is no stranger to LTV. While at Rothschild, he advised it during its first bankruptcy filing in 1986. Still, he has a hard road ahead. So hard, in fact, that some speculate Ross intends to prettify LTV and sell it to a big player like U.S. Steel Corp. "Mr. Ross is in it to make a quick buck. He's not Andrew Carnegie," says a high-ranking executive at a major steel company.
Ross denies that: "We are not liquidators. We think we've identified the problems that led to LTV's failure and that we can correct them."
The trick will be to get a huge productivity boost. Ross wants to reduce the man-hours it takes LTV to produce a ton of steel to less than one, from the current 3.2. "That's along the lines of the world-class steel companies in Asia as well as Nucor [Corp., the largest U.S. steel company]," says Ross.
To make the plan work, he first has to win concessions on wages and working hours from negotiators at the United Steelworkers of America. Although the union backed Ross's bid for LTV, Leo W. Gerard, the USW's international president, says: "We're not interested in cutting any sweetheart deal with Ross." Also, when LTV filed for bankruptcy, more than 60,000 former employees, mostly retirees, lost their medical benefits. Ross has not assumed those costs, and the Bush Administration has refused to pick up the tab. So it's likely that the union will demand restitution.
Even if Ross hammers out a union deal, he must still win major contracts from the appliance and auto industries. LTV lost its biggest client, General Motors Corp., last summer after its quality and delivery got spotty. His plan for LTV is to start slowly, focusing first on finishing off steel products for other mills, then phasing in steelmaking over a year. By the end of 2003, he wants LTV to be making 4 million tons a year--a third the production of Nucor. To pull this off, industry experts estimate Ross will need to invest as much as $700 million. Ross scoffs at the figure. "It will cost a fraction of that. If they're right, we're already out of business."
Although the casualties of the bear market have drawn Ross back to the U.S., he still sees bargain-basement deals in Japan. After a 10-year slump, he notes, the stock market is down 75%, real estate is down 85%, and golf club memberships--which sold for as much as $2 million in the late '80s--are down 90%. Ross maintains that his bank, Kansai Sawayaka, is already turning a profit.
But reforms are taking longer in Japan than many thought. "The biggest risk over there is the meltdown of the financial institutions," says Timothy C. Collins, chief executive of Ripplewood Holdings LLC, which owns Japan's Shinsei Bank. "It's impossible to predict what will happen with the government."
Some of Ross's foreign ventures have faltered. An $840 million deal with Hyundai Securities Co., one of South Korea's largest brokerages, was put on hold in January. One of the lead investors, American International Group, pulled out following disagreements over who would assume responsibility for debts that were discovered after the deal closed. And Ross recently got caught up in a not-so-sweet deal in Mexico when the government nationalized sugar mills. He, along with famed vulture investor Sam Zell, lost $15 million and $30 million, respectively, as bondholders of the country's second-largest sugar refinery.
He has had better luck at home. Ross has almost doubled his money in Fruit of the Loom, the bankrupt underwear company, now that the company is being sold to Warren Buffett's Berkshire Hathaway Inc. for $835 million. Another restructuring, Clarent Hospital Corp. in Houston, is being liquidated for $275 million, doubling his investment there, too.
According to investors, the WLR Recovery Fund LP, which invests mostly in the U.S., has returned an annualized 19% after fees since it was set up on Nov. 1, 1997, through the end of last year. That's nearly triple the 6.5% return for the Hennessee Distressed Index. Ross's Asia Recovery Fund LP is up 30% a year net since it began on Apr. 1, 2000.
If anyone knows the restructuring business, it's Ross. At Rothschild, he restructured more than $200 billion in liabilities. His financial acumen is almost legendary. "You'd go in these meetings with these young MBAs, and they'd all have their fancy calculators out. Ross would take a pencil, do this long division, and get the same number twice as fast," says Financo's Miller, who has worked extensively with Ross.
Others say Ross may be one of a vanishing breed. "These days, the people who are doing distressed are mostly event-driven traders, bankruptcy attorneys, high-yield bond analysts, or portfolio managers," says Thomas McGowan, managing director at Siguler Guff & Co., a private equity firm. "Wilbur is a unique, highly skilled turnaround guy."
Those skills will be put to the test once again with LTV. Says Ross: "This is not an impulse purchase. We've been at this for quite a while. We know the company well, and we know the steelworkers." Even so, for LTV to pay off, the King of Bankruptcy will need nerves of a certain durable metal.
By Marcia Vickers in New York and Michael Arndt in Chicago