Sparrows Point Deal Next Step for Esmark

November 28, 2007, The Herald Star (Steubenville, Ohio), By PAUL GIANNAMORE, Business Editor

STEUBENVILLE — A deal valued at more than $350 million has resulted in a more strongly capitalized Wheeling-Pittsburgh Steel Corp., but the Bouchard brothers say work must continue toward making the company a success for years to come.

James P. and Craig T. Bouchard founded their Esmark steel services firm in 2003 and have acquired 10 steel service centers and distributors since then. With the merger with Wheeling-Pittsburgh Steel Corp. being wrapped up Tuesday, they have taken a major step toward making what they hope will be the fourth largest steel company in the United States.

To reach that level will require them to wrap up a purchase of the huge Sparrows Point, Md., steel mill near Baltimore from Mittal Steel and combine that asset with the new Esmark and its subsidiaries Wheeling-Pittsburgh Steel and the Esmark service centers.

Craig Bouchard is the financial side of the brother team, bringing Wall Street experience to add to his brother’s steel executive experience. He said the company is in better shape than it’s been in decades as a result of the merger.

Craig Bouchard said there is one major hurdle standing between now and completion of that deal. He said the United Steelworkers and Mittal are in discussions about handling the impact on retirees that pulling Sparrows Point out of Mittal could have.

Bouchard, president of Wheeling-Pitt, who will become president of Sparrows when the deal is completed, said he is hopeful the purchase can be finalized in a few weeks.

“Just like Wheeling-Pitt, Sparrows has a VEBA. There is an ISG master VEBA that is fed by the profitability of Mittal Steel USA. Taking Sparrows out of that has left a small hole in the payment stream to that VEBA, and the Steelworkers and Mittal are having discussions about how to solve that issue,” Bouchard said. “It’s not our issue. We’re an observer in the process.”

VEBAs, or Voluntary Employee Beneficiary Associations, are funded with stock from companies to cover hospitalization and retirement costs for employees. Wheeling-Pitt’s VEBA was the largest shareholder in the steelmaker, for instance. ISG was the International Steel Group, which bought Bethlehem Steel’s assets, including Sparrows, out of bankruptcy. ISG sold its holdings, including Weirton Steel to Mittal.

Bouchard said negotiations already have begun between the new Esmark board of directors (which is the same membership as the former Wheeling-Pittsburgh board) on eventual merger of E2 into Esmark.

He explained the process will involve first E2, which is a wholly owned venture of Esmark to buy Sparrows, completing the purchase of Sparrows. After that, a full agreement would have to be reached between Esmark and E2, followed by votes by both boards and then a shareholder vote by Esmark. Bouchard estimated the process would take about six months from the completion of the Sparrows Point mill purchase.

E2 is a venture of Esmark with previously announced partnerships with Brazilian ore giant CVRD and Ukrainian steelmaker the Industrial Union of Donbass. CVRD and IUD have said they would supply up to $270 million each to the purchase. The Sparrows deal has been valued in some reports at more than $1.3 billion.

As for the future at Wheeling-Pittsburgh, Bouchard said there are not only a series of modernization projects that require capital, including a previously announced new cold mill at Steubenville, but also an initiative to develop natural resources, including coal and natural gas, on Wheeling-Pitt property.

“Wheeling-Pittsburgh owns roughly 4,000 acres in three states, across Ohio, West Virginia and Pennsylvania, and we’ve been told by three energy companies working on the property, who are potential partners for us, that there is the potential for reserves,” he said.

Wheeling-Pitt spends about $9 million a month on natural gas and petroleum, so developing the reserves “is a fantastic opportunity for the company” to save money, Bouchard said.

Bouchard declared the 93 percent approval among shares that voted to be “a landslide.”

“I’ve never seen an election, except in the old Soviet Union, where the winner got 90-plus percent,” he said.

The merger was structured to bring in between $50 million and $200 million in the shareholder votes alone. However, because of the number of shares that were sold back to the company by choice of the shareholders, who were offered $20 a share up to a cap of $150 million total, the shareholders votes brought in $50 million.

“The first reaction is because of the history of the company, the more liquidity, the better, but when you look at the final numbers, there is $167 million in liquidity for the company, and that’s more than it has had in two decades. There are other good things on the horizon that are going to happen to us on this front. We have a very strong, supportive global bank group behind this company. It hasn’t been like that before, either,” Bouchard said. “I’m not too disappointed about it. The flip side is, because of the puts (share sales back to the company), there are fewer shares, so for the existing shareholders, they own a bigger piece of the company.

“I’m a little disappointed, but not too much disappointed,” he said.

Bouchard takes a more positive view because of the change in the debt-to-equity ratio of Wheeling-Pitt. Where the independent Wheeling-Pitt had 70 percent debt and 30 percent equity, the new Esmark Inc. has a balance sheet with 60 percent equity and 40 percent debt.

“That flip-flop to mostly equity from not very much equity is a gigantic improvement for this company. Having more debt than equity in this industry is a death wish,” he said. “When we came in on Dec. 4 of last year, the first thing Jim said was to fix the balance sheet of this company. He has delivered on that promise that was made to the company, to the shareholders and to the community that depends on this company.”

He also cited the 2,000 customers Esmark brings to Wheeling-Pitt, modernization that has taken place under Esmark’s management despite the tough year Wheeling-Pitt had as well as a 50 percent improvement in the company’s safety record. Wheeling-Pitt spent $10 million on modifications to the Mingo Junction electric arc furnace and $3 million on the hot strip mill.

“We have our fans and our critics, but we wish to be judged on what we say and what we do,” Craig Bouchard said. “What we said on the first day and now one year later, without the benefit of the merger, all that has been accomplished. Now the company is positioned to execute its plan. It will not be easy. The economy is not great and steel consumption is not up yet. We think steel prices are going to go up, but in the face of a soft economy, we are positioned not only to survive but to succeed and grow. This is the best day in a long time at Wheeling-Pittsburgh Steel.”

One man who has known the darker days at Wheeling-Pitt is board member Jim Bowen, a USW designee on the board. Bowen was a Steelworkers executive during the first bankruptcy of Wheeling-Pitt in the mid-1980s and has been on the board since the company emerged from its second bankruptcy in 2003.

“Today means we have a fresh start,” he said. “Are we ready to celebrate and say we are the best steel company in America? No. We do have the ability to get better and we will, with the partnership between the United Steelworkers and the company and management, we’re all on the same team.

“We’re going to make it happen, and that should be an assurance to those in the valley that there are going to be jobs at Wheeling-Pittsburgh Steel because, over the years, on several occasions, it could have been shut down just by turning the switch off and shutting the door,” Bowen said.

Of the Bouchards, he said, “They’re like the Energizer Bunny. They have the ability, if you watch all the little things that have occurred over the last nine or 10 months, to raise funds and make things happen and they’re willing to do so.”

He said the Steelworkers have a true partnership with Esmark.

“Sometimes it’s by contractual obligation and other times it’s because we want to, and as far as I’m concerned, we want to,” Bowen said.

Craig Bouchard said it’s important to move forward with the Sparrows acquisition and eventual merger.

“Seventy percent of the steel in the United States is made by three companies: Nucor, Mittal and U.S. Steel. That’s a huge consolidation that has occurred in less than 10 years,” Bouchard said. “With consolidation, it’s tough to survive if you do not become a big guy. We can become the fourth largest steel company and continue growing.”