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Bidding for National Steel gets personal

Former U.S. Steel executive ups the ante on his old employer

Thursday, February 20, 2003

By Len Boselovic, Post-Gazette Staff Writer

Thirteen years ago, Richard M. Wardrop Jr. resigned as general manager of U.S. Steel's Mon Valley Works after an audit revealed he and other individuals had used company funds to purchase ski passes, golf clubs and other goods for personal use.

 
 
Graphic:
Big Steel's love triangle

   
 

These days, the stakes between the temperamental, impulsive Wardrop and his former employer are much larger.

As chairman and chief executive officer of AK Steel, Wardrop is bidding against U.S. Steel for the right to buy bankrupt National Steel, the troubled industry's ripest piece of unplucked fruit. Personal intrigue aside, the showdown over National is a watershed event in the industry consolidation President Bush envisioned when he gave battered domestic producers protection from imports in March.

Winning National would broaden AK Steel's share of the automotive market, provide more raw steel to feed its underutilized finishing mills, and get it into new markets. It would also give Wardrop the last laugh at U.S. Steel's expense.

Indeed, some in the industry speculate Wardrop is offering $1.13 billion for National only to raise the price his former employer will have to pay for it. AK Steel's bid trumped previous offers from U.S. Steel, including its initial bid of $950 million on Jan. 9.

"I think he [Wardrop] threw the bid in at the last minute to agitate them more than anything else," says one industry consultant. "He's looking to see if he can screw them somehow."

National's automotive business is only one reason why the deal appeals to U.S. Steel Chairman Thomas J. Usher. More than a year ago, Usher offered to acquire a handful of his battered domestic rivals on three conditions: that Bush provide relief from imports; that the government help with billions of dollars in pension and retiree health care costs; and that the United Steelworkers of America agree to a cost-saving contract.

Unproductive initiative

So far, the only thing Usher has to show for his initiative is the three years of duties Bush imposed on some imports. The two biggest prizes among its domestic rivals -- if chronically unprofitable, liability-ridden steelmakers can be considered prizes -- have already been claimed. International Steel Group of Cleveland purchased LTV Steel last year and is bidding about $1.5 billion for Bethlehem Steel. U.S. Steel hasn't bought anything, despite more than two dozen producers seeking bankruptcy protection.

Moreover, it was ISG's Wilbur Ross, not Usher, who seized the initiative in negotiating a new contract with the USW. The agreement, which analysts estimate gives ISG about a cost advantage of about $100 a ton over other unionized steelmakers, will be the pattern for contract talks on the fate of National's workers. Neither U.S. Steel nor AK Steel can acquire National without first negotiating a new labor agreement with USW President Leo W. Gerard.

That's where Usher may have the upper hand. AK Steel and the union are still trying to resolve issues from a three-year dispute at the steelmaker's Mansfield, Ohio, plant, which idled about 600 USW members.

Wardrop sued the union under the Racketeer Influenced and Corrupt Organizations Act, a federal law created for combating organized crime. AK Steel also financed an advertising campaign, including billboards and television spots, portraying the union and its leaders as violence-condoning thugs.

"Clearly, AK has a problem with the union," says Charles Bradford of Bradford Research.

Industry observers say the troubles at Mansfield illustrate just how feisty, vindictive and unpredictable Wardrop can be. One source who asked not to be identified describes the 57-year-old McKeesport native as "the last of the genetically flawed steel dinosaurs." However much they upset the union and others, Wardrop's methods work. Analysts generally give him high marks for knowing how to get the most out of a mill at the lowest cost.

"They've done wonders in the blast furnace side of AK and that's where the costs are," Bradford says.

Workers at U.S. Steel's Irvin plant in West Mifflin still talk about the day Wardrop ordered production halted at noon, summoning them all to the plant's main parking lot, where he lectured them about the large amount of defective sheet steel that had been rejected by customers. To make his point, Wardrop ordered a flag symbolizing U.S. Steel's quality program lowered to half mast.

"A lot of us thought it was childish for a plant manager," says a retired union officer.

Wardrop's demise at U.S. Steel stemmed from problems with management training programs the company conducted at Hidden Valley Resort in Somerset County. A July 30, 1990, company audit report, obtained recently by the Pittsburgh Post-Gazette, cited "substantial abuses of authority over approval of vendor bills."

Most of the blame for purchasing ski passes, boots, jackets and other sporting equipment for personal use was placed on the program's coordinator, who was supervised by Wardrop. The report states, however, that Wardrop admitted four ski parkas worth about $1,200 were purchased for him, his wife and son, and a shift manager at Irvin.

Wardrop, the program coordinator and two other individuals resigned according to the audit.

AK Steel spokesman Alan McCoy declined to comment on the report or Wardrop's departure from U.S. Steel.

A tightly run ship

Subsequently, Wardrop followed former U.S. Steel Vice Chairman Thomas C. Graham, one of the industry's most admired operators, to Washington Steel and eventually to AK Steel in 1992. At the time, AK Steel was a hemorrhaging joint venture between Armco and Kawasaki, a Japanese steelmaker. Under their care, it became a paragon of profitability in an industry known for its chronic underperformers. In 1999, Wardrop turned the tables and acquired Pittsburgh-based Armco.

"AK is a very tightly run ship. They've got a different mindset than many of the other [integrated steelmakers]," says John Anton, a consultant with Global Insight in Washington, D.C.

The mindset includes not shying away from confrontations, whether with the USW or the nation's biggest automaker. Even though Detroit, the industry's biggest customer, is usually treated with kid gloves, AK Steel is suing General Motors over the company's failure to pay for changes the steelmaker believes are outside the scope of their contract. Although mergers like the National deal are giving steelmakers more leverage in that relationship, analysts were nonetheless surprised that Wardrop would take GM to court.

AK's McCoy bristles at the notion that the Middletown, Ohio, steelmaker is feigning interest in National just to drive up the cost for U.S. Steel, calling it "maliciously untrue."

"We are absolutely serious about the value we see in these assets," he says, noting that AK believes it can realize $250 million in annual savings by acquiring National vs. U.S. Steel's estimated annual savings of $170 million.

For the time being, Wardrop has the upper hand in the fight over National. This month, a bankruptcy judge in Chicago named AK the lead bidder. That means that all other things being equal, U.S. Steel will have to top AK's $1.13 billion bid in order to get National at a court-supervised auction scheduled for April 1. That could change if bad blood prevents AK from negotiating a new contract with the union.

The consensus of analysts is that National would be a better partner for U.S. Steel, which wanted to acquire National as far back as 1984. That deal was aborted after the government opposed it for antitrust reasons. While there are still concerns about how National would boost U.S. Steel's or AK's clout in markets where they are already dominant, some industry handicappers don't expect antitrust issues to be a deal breaker this time. They cite Bush's interest in consolidation and the increasingly global nature of the steel business.

They also say acquiring National would pose more credit risks for AK Steel.

McCoy dismisses those concerns, saying "we have a financing commitment from our investment bankers."

Some observers say AK needs National more because it doesn't have as many options for growth. U.S. Steel acquired the Slovak Republic's leading steel producer in 2000 and has plans to build on its profitable beachhead in Central Europe. Those plans are being engineered by John Goodish, the man who replaced Wardrop as the head of U.S. Steel's Mon Valley Works.

Once National is gone, only three large U.S. steelmakers will be available. Ispat Inland, another Indiana steelmaker, is controlled by LNM Group, the world's fourth-largest steelmaker. LNM, which is bidding against U.S. Steel for Central European steelmakers, is more likely to be a buyer than a seller in North America, analysts say. That leaves bankrupt Wheeling-Pittsburgh and nearly bankrupt Weirton Steel, two West Virginia producers that don't have the appeal National does.

No matter who gets National, Bradford says, consolidation won't improve the troubled industry's long-term prospects unless inefficient plants are closed for good. Keeping such plants open hurts healthier producers by putting downward pressure on prices. That's what happened in the second half of last year after ISG and others restarted plants idled by bankruptcy.

"So far, consolidation hasn't helped anybody," Bradford says.


Len Boselovic can be reached at lboselovic@post-gazette.com or 412-263-1941.

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