International Steel Group Inc. Monday offered $1.5 billion for bankrupt U.S. steelmaker Bethlehem Steel Corp. in a deal expected to include a precedent-setting low-cost labor contract that has eluded an industry struggling with ballooning retiree costs.
If completed, the transaction would pave the way for rival steelmakers to strike similar labor contracts and eliminate a problem that has helped push more than 30 steel companies, including Bethlehem Steel, into Bankruptcy Court since 1997.
ISG, backed by New York buyout firm W.L. Ross & Co., said it made the offer for "substantially all" of the Bethlehem, Pa., company's assets, and expects both Bethlehem's board of directors and the United Steelworkers of America union to support the proposal.
ISG's main hurdle was "legacy costs," or pension plan and retiree health-care debts. As part of the deal, ISG said Bethlehem's workers would fall under a lower-cost labor contract struck with the union last month.
"The contract that has been put in place between the union and ISG really sets the stage for further consolidation within the industry," said Chris Olin, an analyst with Midwest Research, who added that the contract helps to "lower the cost structure for the industry, which is in bad need of it."
The deal also includes the assumption of some liabilities and needs to be approved by U.S. Bankruptcy Court. Sources close to the situation said the deal would result in a substantial number of job cuts, as well as reductions in benefits for Bethlehem retirees.
A consolidation plan put forth by United States Steel Corp. last year, which hinged on extensive help from the government to pay legacy costs and would have included absorbing Bethlehem Steel, was shelved when President Bush refused to pay the hefty costs.
Robert Miller, chairman and chief executive of Bethlehem Steel, said because of the new contract, the deal with ISG "constitutes about the most dramatic thing that's happened in the American integrated steel industry in the last 20 years."
Now, more recent proposals from elsewhere in the industry, such as U.S. Steel's plan to acquire bankrupt National Steel Corp., should be easier to work through, analysts said.
Competitors will have to act quickly to put new contracts in place or suffer the consequences.
"ISG has a huge cost advantage in that labor contract," said Chuck Bradford of independent research firm Bradford Research. "And those other companies are going to be in deep yogurt if they can't be competitive."