Melting Away Steel's Costs

When financier Wilbur L. Ross Jr. got into the steel industry three years ago, he didn't have to spend much. Shopping the nation's bankruptcy courts, Ross and his co-investors picked up the assets of five producers, including giants Bethlehem Steel Corp. and LTV Corp., for $2.1 billion, and melded them into International Steel Group Inc.

So what makes these cast-offs worth $4.5 billion today to London-based steel tycoon Lakshmi N. Mittal? A resurgent industrial economy and a much-shrunken payroll explains part of it. But what really makes ISG so valuable is that it has shed the legacy costs that burden other old-line manufacturers. Through bankruptcy, Ross shifted $14 billion in pensions to the Pension Benefit Guaranty Corp. (PBGC), which is backed by the federal government. He also passed off more than $5.9 billion in retiree health-care costs onto either the former workers themselves or Medicare.

The transfers were entirely legal. Indeed, the United Steelworkers of America endorsed the retiree-benefit cutbacks as the price of maintaining jobs at the bankrupt steel mills. For now, the PBGC has been able to pick up its new obligations through fees on other defined-benefit pension plans. But the PBGC is warning that if major airlines follow Ross's course, it may soon be overwhelmed and have to turn to taxpayers for money.

For his three years of labor in steel, Ross is personally pocketing $300 million, while his investors sock away up to $2.1 billion. Says Ross: "We did fine." Successful in steel, Ross is now trying his hand in the coal industry. He has formed a new company, International Coal Group, by buying assets of three bankrupt mines. And in September, he won court approval to hand off $132 million in pension obligations of one of these companies, Horizon Natural Resources Co., to the PBGC. When you've got a winning strategy, why change it?

By Michael Arndt in Chicago

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