The Forging of a Steel Magnate

Financier Wilbur Ross talks about his unusual route to becoming one of the battered industry's most important players

Only a year ago, Wilbur L. Ross Jr. was a nobody in the U.S. steel industry. Indeed, his steel holdings were limited to a Jeep Cherokee and Mercedes-Benz hardtop convertible. Make no mistake: The Big Steel fraternity knows him today.

In April, the New York financier snapped up the steelmaking assets of bankrupt LTV for $262 million through his private-equity firm, W.L. Ross. He christened his new enterprise International Steel Group (ISG ), and within a month began rehiring laid-off workers and restarting what had been the nation's No. 4 steel producer. In October, Ross followed up that purchase by paying $65 million for idle assets of another bankrupt steelmaker, Acme Metals.

Now, with mills in three states, Ross is on the verge of his biggest steel acquisition yet. On Nov. 5, he began exclusive negotiations to acquire the assets of America's third-ranked steel company, Bethlehem Steel, which went bust a year ago. If Ross can work out a deal -- he has until early January to complete his due diligence -- his Cleveland-based ISG would vault U.S. Steel (XSS ) and Nucor (NUE ) to become the nation's largest steel company.

A COSTLY LEGACY.

  By themselves, the deals would be enough to get Ross noticed. His legacy, though, may be his business model. By purchasing only assets and not the corporations themselves, Ross was able to walk away from pension and retiree health-care benefit obligations -- "legacy costs," in industry vernacular -- that helped drag these steelmakers under. Moreover, Ross was able to avoid all their other debts as well as United Steelworkers of America union contracts, which locked the companies into rigid work rules and high pay.

The 64-year old has become a wealthy man by bargain-shopping in bankruptcy court and then engineering financial restructurings, first at investment bank Rothschild, where he worked for 24 years, and then at W.L. Ross, where he has been chairman and chief executive since 2000. His next bet may be a longer shot: To make a Bethlehem Steel purchase pay off, Ross concedes he would have to jettison its $3 billion obligation to its 75,000 retirees and ditch all its other debt, too. Creditors may squawk. But Ross does have the backing of the steelworkers union.

Recently, he talked with BusinessWeek Senior Correspondent Michael Arndt about his foray into steel and his overall aims in business. Edited excerpts of their conversation follow:

Q: One of your advantages is that you've come into the steel industry with virtually no debt. But steel is a very capital-intensive industry, and sooner or later your plants are going to require some heavy investment. Does that mean you'll have to take on debt and eventually turn into what had been LTV?

A:

No. Debt is a function of your philosophy of capital structure. The big steel companies weren't required to borrow money rather than sell stock. We've now done two rounds of equity raising. They've all chosen to make big debt burdens instead.

Q: But can you continue to do that indefinitely?

A:

We're not saying we're never going to borrow anything. But there's a far difference between having some borrowings eventually and deliberately having a junk-bond capital structure. Essentially, the whole steel industry is junk bonds. It doesn't make sense to me that a capital-intensive, cyclical industry should have also a huge degree of financial leverage.

If you just did a chart of how many dollars a ton each of the companies pays in interest, you'd see that's a big portion of their problems vis-à-vis the foreigners. It clearly drives up the breakeven point. We're going to be very stingy.

Q: So how did the steel industry get into such a mess?

A:

Looking into a rearview mirror, you can see huge mistakes were made. The contract terms they were giving probably were always going to be unaffordable. And it kind of makes you wonder what they were thinking when they put in the last several rounds of pay increases. Korea's steel industry already existed. Japan's steel industry already existed. China's steel industry already existed. How they could shut their eyes that we were now into a worldwide situation, I don't understand. All that I know is that's it isn't affordable.

Q: Let's talk about labor. What kind of relationship do you have with the Steelworkers union?

A:

What we have is a different relationship with the workers. We've been inviting the actual workers, the guys out there on the floor, to tell us how can we run their equipment better, how could we save time and increase production. You would be amazed at how much a guy who has spent 20 years doing one particular thing knows about it. But they never felt before that anyone would pay attention to them or that they would get any kind of award or attention for helping. One of our things has been to liberate the worker.

Q: But you have imposed work-rule changes and are outsourcing jobs to lower-wage contract workers, aren't you?

A:

Yes, but one of the surprising things is that many of the changes we have implemented were work-rule changes that the union had volunteered to LTV and LTV never implemented. Now I have no explanation for why that's the case.

But I think it's quite clear that labor gets it. There have been more than two dozen steel companies that have gone bankrupt in the past five years. That's a frightening number. They know that the only good steel job is the job with a profitable and healthy company.

Costs also mean management salaries. The industry needs to be fixed, and it goes way beyond the union. LTV had seven layers of management. Today, from the factory floor to the chief executive, there are three. We have 22 executives today. They had 500 to 600 executives. They had more lawyers than we have executives.

Q: But don't rank-and-file workers resent you for taking advantage of their dire straits?

A:

We're not taking advantage of them. There were 8,000 people out of work. Now 2,500 of them have jobs. Is that better or worse than the alternative, which would have been all 8,000 of them without jobs?

Q: Was it difficult to win back LTV's customers?

A:

We haven't won them all back. But we don't necessarily want all of the customers LTV had because when people get desperate, sometimes they undercharge for their product and take credit risks. We want only customers who will let us make a reasonable margin, who will pay us more or less on time, and who won't kill us with demands for excessive service.

Q: If you get the Bethlehem assets, is that the end of the acquisition game for you?

A:

Bethlehem is such a big transaction for us it will be a transforming event. And frankly we hadn't expected to do anything other than LTV for a year or two. The only reason that we've started doing other things is that the LTV acquisition was much less troublesome than we had anticipated. But size isn't our main aspiration. Our only girlfriend is to generate a satisfactory rate of return on our products.

Q: So what's next after steel? What about airlines? They seem to fit your definition.

A:

The airlines are an industry we keep looking at, but we haven't figured out what is it we could do that would really add value. Just changing whose name is on the stock certificate doesn't really do much. We don't feel like we have to be in everything. We'd rather be in a small number of things where we can make an impact.

Q: Did you ever envision that you'd end up being a big figure in the steel industry?

A:

No. The nature of our work is we go where there are difficulties, where we think we can contribute to a turnaround. People use the awful term "vulture" for us. We're not vultures. A vulture to me is a liquidator.

If we were a bird, it would be the phoenix, which rises from its own ashes. Because that's what we try to do: add value and rejuvenate an otherwise hopeless situation.

Edited by Patricia O'Connell

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