Sunday, March 16, 2003

AK Steel faces its future

Union looms as impediment, but Middletown firm still wants to purchase rival company

By Mike Boyer
The Cincinnati Enquirer

[photo] AK Steel's Mansfield Electric Furnace in Mansfield, Ohio, is being manned by union workers again after a three-year lockout.
(Photo courtesy AK Steel)
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For AK Steel's $1.1 billion bid for National Steel Corp. to be successful, it must first come to terms with an old foe: the United Steelworkers of America.

The Middletown-based company and the union representing 6,000 of National's 8,200 employees are in private talks aimed at hammering out a labor agreement by March 26.

The deadline for a contract, a requirement of AK's agreement to purchase National's assets, was extended a week ago after AK presented the Steelworkers with a contract proposal.

Mishawaka, Ind.-based National, which had revenues of more than $2.6 billion last year, would be a good fit with AK Steel, analysts said.

National, which operates major plants in Ecorse and Canton, Mich., Portage, Ind., and Granite City, Ill., would double the size of AK Steel.

"(AK Steel) wants these mills,'' Michael Locker, a steel industry consultant, said. "They fit. They can use the capacity (and) they can use the finishing operations to round out their product mix.''

The acquisition would give AK Steel much needed additional raw steel-making capacity, deepen its industry-leading role as a supplier of automotive steel and give it access to the tin can and construction steel markets.

But the prevailing wisdom - echoed by Leo Gerard, Steelworkers president - is that AK Steel will have a difficult time coming to an agreement with the union. The belief is that the acrimony and unresolved issues from the recently ended three-year lockout of 600 members of Steelworkers Local 169 at AK's Mansfield, Ohio, stainless steel plant will be too difficult to overcome.

AK, which was acquiring the former Armco Inc., including the Mansfield plant in September 1999, backed the lockout of Local 169 amid, what the company said, were threats of violence and damage within the mill.

After completing the $1.3 billion Armco acquisition, AK continued to operate the mill with replacement workers.

The bitter lockout - which divided Mansfield - was marked by picket-line violence, lawsuits and a heated war of words.

AK Steel Holding Corp.
Integrated producer of carbon, stainless and electrical steels.
Headquarters: Middletown.
Major plants: Middletown, Ashland, Ky., Coshocton and Mansfield, Ohio, Rockport, Ind., and Butler, Pa.
Chief executive: Richard M. Wardrop Jr.
Employees: More than 10,000.

National Steel Corp.
Integrated steel producer of automotive and construction steel and tin for containers.
Headquarters: Mishawaka, Ind.
Major plants: Ecorse and Canton, Mich.; Portage, Ind.
Chief executive: Mineo Shimura.
Employees: 8,200.
Despite the rocky relationship with the Steelworkers, Richard M. Wardrop Jr., AK chairman, said the company thinks that it can work out an agreement with the union.

Wardrop, who helped lead AK Steel from the brink of bankruptcy in the early 1990s, points out that the company negotiated 10 labor agreements, including four with the Steelworkers, during the course of the Mansfield lockout.

"We can and do get labor deals done, and we can at National Steel,'' he told investment analysts shortly after AK outbid rival United States Steel Corp. as the preferred bidder, or "stalking horse,'' for a planned April 2 bankruptcy auction of National Steel's assets.

As lead bidder, any competing bid would have to top AK Steel's offer by $17 million, including a $15 million breakup payment to the Middletown company. But AK would lose that advantage without a labor agreement.

U.S. Steel, the nation's largest steel maker, can still try to outbid AK Steel for the National assets in the bankruptcy auction that must be approved by Bankruptcy Judge John H. Squires of Chicago in a hearing April 7.

And Pittsburgh-based U.S.Steel has opened its own negotiations with the Steelworkers for a contract covering not only the National workers but its own 12,000 employees represented by the Steelworkers.

All of which has led some observers to conclude that AK won't be successful in the Steelworker talks.

`'I still think (AK's) management isn't clued in sufficiently to understand what it would take to get an agreement with the Steelworkers,'' said consultant Locker, who has worked extensively with labor unions.

But not all labor officials are pessimistic.

"You can't say it can't be done, because it can be,'' said Ed Shelley, president of the 3,000-member Armco Employees Independent Federation (AEIF) at the company's Middletown mill.

A veteran of many contract negotiations with AK Steel, Shelley said, "I think the company could be successful. I realize the history between the (company and union) is not good, but if you set that aside, I think they could get an agreement.''

Even if AK Steel is unsuccessful in acquiring National, that isn't likely to dull the company's appetite for acquiring a steel company.

"If we're not successful, and I hope and believe we will be, that wouldn't change our strategic direction,'' said Alan McCoy, AK spokesman..

He said the company would continue to look at steel assets that would add value to the company for AK shareholders, broaden the company's product line and provide cost-cutting synergies.

There's plenty of steel companies to choose from. More than 30 steel companies in the United States have sought bankruptcy reorganization including such leading suppliers as Cleveland's LTV Corp. and Bethlehem Steel Corp., which have been acquired by International Steel Group (ISG) Inc., a new company created by Wall Street investment banker Wilbur Ross.

AK's McCoy said the company isn't looking at acquisitions just to get bigger.

"Our view is that bigger isn't necessarily better,'' he said.

He said the proof of that is that Bethlehem Steel, once the industry's second largest company, and Cleveland-based LTV Corp., once the nation's third-largest steel maker, are just now emerging from bankruptcy reorganization.

"Being number 2 and number 3 didn't help,'' he said.

Still, AK Steel believes industry consolidation will continue, and it expects to participate in the trend.

If it fails to win National Steel, Locker said the company could pursue any of several other alternatives.

Among them: Wheeling -Pittsburgh Steel Corp., which recently failed to win a government loan guarantee, and Weirton Steel Corp., which, like National, also produces steel for tin cans.

The company might also look to Canada where Dofasco Inc., and Stelco Inc.,parents of Gallatin Steel Co. in Warsaw, Ky., might be merger candidates, or to Mexico where AK Steel already has marketing relationships, Locker said.

The Steelworkers union says it wants a labor agreement similar to that reached recently with Cleveland-based ISG.

It includes improvements in wages and job security while giving workers a greater voice in plant operations.

Locker said AK could offer the same type of contract terms as U.S. Steel, but the question is whether the parties can bridge their distrust of each other:

"Given the animosity and long-term and deep suspicions, can AK offer enough to entice the steelworkers to see the advantage of going with them as opposed to U.S. Steel?''

AEIF's Shelley thinks those issues can be overcome.

Shelley is of two minds on what impact a National Steel deal would have on AK's Middletown Works.

While acquiring National would double AK's size and expand its presence in the industry, "I also realize if it occurs, there will be negatives,'' he said.

"There will be some shakeout between AK's facilities and National's facilities. At this point, I don't know what impact that will have on Middletown.''


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