As Wilbur Ross settles into his seat in the dining room at the Four Seasons restaurant in New York, his genteel, patrician manner and soft-spoken voice belie his no-nonsense business reputation. For when it comes to resurrecting bankrupt, unloved companies in sectors that have been scorned and shunned by others, Ross is the Man of Steel. His latest coup comes with the announcement in October that he is selling Richfield, Ohio-based International Steel Group Inc., a company he cobbled together by buying insolvent or financially distressed U.S. steelmakers, to Indian-born tycoon Lakshmi Mittal for cash and stock worth US$4.5 billion. It's yet another demonstration of how the unassuming 66-year-old financier, considered one of the best turnaround experts in the United States, finds value and profits where others fear to tread.
“All industries — for instance, retail, steel, airlines, oil and gas — from time to time tend to go bad,” explains Ross over a light lunch of salad niçoise. Figuring out which industries are set to decline two or three years down the road is an obligatory part of Ross's research, but the real challenge, he says, is picking “which of the distressed companies within a given sector are salvageable; can you take a bad business and make it a viable operation?” And when Ross finds his target, usually when it gets to bankruptcy court, he sets his mind to turning it around. “It's a question of seeing value where others see none, seeing opportunity where there's huge risk,” says Harvey Tepner, a Canadian-born investment banker based in New York, who learned the ropes from Ross a decade ago.
But Ross isn't sentimental about his acquisitions; if he sees a good opportunity to sell a business that he's managed to rehabilitate, he won't hesitate. “The idea is buy when people are selling, and sell when people are buying,” says Tepner, who now manages Compass Advisers, a boutique restructuring firm. On the International Steel Group deal, for instance, Ross will personally pocket close to US$300 million, while his firm, W. L. Ross & Co., will take in about US$1.2 billion. Even before Mittal's offer, which works out to about US$42 a share, Ross's investment in the steel industry had already shown huge upside. At the time the Mittal deal was announced, shares of International Steel Group (NYSE: ISG) were trading just below US$30. Ross figures he paid around US$3 a share in equity to buy all the assets that make up ISG, before hammering them into one of the lowest-cost steel producers in North America.
Ross's decision to sell ISG to London-based Mittal — creating the world's largest steelmaker — is bound to have huge repercussions in the industry, setting off a consolidation spree of global proportions. “It's an inevitable trend, and this transaction is bound to accelerate it,” says Ross. Indeed, soon after the deal to sell ISG was announced (it will be combined with the Mittal family's Ispat International and LNM Holdings to form Mittal Steel Co.), Russian steel giant OAO Severstal confirmed rumours that it is interested in buying out Hamilton-based Stelco Inc., which has been in bankruptcy protection since January. Severstal hasn't disclosed what it is willing to pay, though it indicated it would assume Stelco's secured debt and put up to $400 million into the steelmaker. At the same time, GMP Capital Corp. has partnered with GE Capital Canada to work on a bid to inject new equity into Stelco and restructure its $1.2-billion debt. Toronto hedge fund managers Clearwater Capital Management Inc. and Equilibrium Capital Management Inc. have also indicated interest in Stelco, and Pittsburgh-based United States Steel Corp. is said to be deciding whether to throw its hat into the ring.
Randy Cousins, a steel analyst with BMO Nesbitt Burns in Toronto, says the industry has been going through a period of regional consolidation as years of weakness led to many producers going bankrupt. How quickly this consolidation will become a global process is up in the air, but the Mittal deal with ISG “is an indication that this process has already started,” says Cousins. “The real question is whether there will be a Canadian steel industry, or will all Canadian steel companies eventually become a division of a larger, global entity.”
Ross has turned his eye toward Canada on more than one occasion when it comes to looking for value among the wrecks of business. For instance, he acted on behalf of several so-called vulture funds circling Eaton's, the iconic, now-defunct department store retailer, after it filed for bankruptcy protection back in 1997. Two years ago, his firm became the largest creditor of optical fibre network company 360networks Corp., helping it acquire Toronto-based Group Telecom while both companies were in bankruptcy protection. In May, 360networks announced it was selling Group Telecom to Bell Canada for US$205 million. Ross says it had become profitable and was sold “for a big gain in less than 18 months,” helping 360networks eliminate its debt.
It's deals like this that led Fortune magazine to dub Ross the King of Bankruptcy. During his career, he has been involved in the restructuring of more than US$200 billion in defaulted company assets around the world. He has also created private investment and hedge funds totalling more than US$2 billion. For 26 years, Ross — a graduate of both Yale and Harvard universities — was executive managing director of Rothschild Inc., the U.S. affiliate of the family merchant banking group. But in March 2000, he struck out on his own by purchasing Rothschild's distressed investment activities to form W. L. Ross & Co., with offices in New York and Tokyo. “I had come to a couple of conclusions,” says Ross. “First, I realized I preferred the investing side of the business to the advising side. Second, it was hard to build up both sides of the business because of the potential conflict of interest: if an interesting company went bankrupt, the dilemma became whether to seek the advisory assignment or invest in it, since we couldn't do both. I was getting concerned there was going to be a traffic accident.”
Ross's timing couldn't have been better for finding takeover candidates among the fallen. The stock market crash of 2000-01, a global recession, scandals such as WorldCom and Enron, and the tragedy of 9/11 all pushed a huge number of companies into bankruptcy. Ross picked up the pieces of failed businesses for pennies on the dollar and breathed new life into them on his terms.
It is in his creation of ISG where you can see all the elements of Ross's investment style. After studying the steel industry for several years, and seeing it was ripe for consolidation, he and his investment partners organized ISG in 2002 and acquired the assets of Cleveland-based LTV Steel for US$325 million. ISG then purchased Acme Steel Co. for US$65 million. Both were in bankruptcy and no longer operating. In May 2003, Ross and his investors bought Bethlehem Steel Corp. for US$1.5 billion, pulling it out of the jaws of bankruptcy and making ISG the second-biggest integrated steel producer in the United States.
Since then, there have been a number of smaller deals, designed to fill in gaps or complement ISG's production capacity. The result of all this activity — obviously helped by higher prices resulting from the huge surge in demand for steel, especially in China — is that ISG became immensely profitable, earning US$421 million (US$4.15 per share) on revenue of US$6.5 billion for the first nine months of this year, compared to a loss of US$48.4 million (66¢ a share) on US$2.6 billion in revenue in the same period of 2003.
The proposed sale of ISG to Mittal means Ross's role as an active steel tycoon and consolidator is coming to a close. However, he will keep a stake in the new Mittal Steel, sit on its board and advise the company on investment strategy and acquisitions. “We would never have sold it for as low as $42 a share, taking half of that in shares of the new company, if we didn't still think there was huge upside,” says Ross.
His more recent acquisitions have focused on the coal sector, another apparent relic of the industrial age. Ross picked up the assets of Ashland, Ky.-based Horizon Natural Resources Co. out of bankruptcy court for US$786 million to create International Coal Group. He figures that if oil prices continue at current levels, or go even higher, industry will look to cheaper alternatives like bituminous coal, which is commonly used in electricity generation. The coal industry will also be helped by China's voracious appetite for energy, as well as new technology being developed to burn coal more cleanly. Whether this latest addition to what has been dubbed Ross's Empire of the Damned pays off the same way as steel remains to be seen. But based on his track record, the fruit of this investment bottom-feeder's labour is more likely to resemble a phoenix than carrion.