Wilbur Ross Is A Man Of Steel ...and textiles and optical networking and anything else in deep, deep trouble.
(FORTUNE Magazine) – Each weekday morning at eight, Wilbur Ross and his team of analysts gather around the conference table in their midtown Manhattan offices to go over what Ross calls his "shopping list." On that list are 50 to 75 seemingly healthy companies that they expect to falter in the next year and that Ross hopes to pick up at a bargain. It's not that Ross wants them to fail; he just doesn't find them interesting until they do. A flourishing enterprise makes Ross yawn. But a bankrupt, rusted-out wreck, suffocated by high labor costs and foreign competition, captivates him.
Ross is a contrarian. Where others see a scrapheap, he sees a fabulous return on investment. Through boom and bust, four presidential administrations, and the temptations of mergers and the Internet boom, financier Ross has been steadfast in his pursuit of distressed and bankrupt companies. Today, with global markets in recession and the bull market a distant memory, companies are piling up on the rubbish heap. And no one picks through the trash better than Wilbur Ross.
During the past couple of years Ross's firm has invested in more than 70 distressed properties, all of them in industries eulogized by the business world. In textiles Ross has stakes in apparel and carpet maker Burlington Industries and denim producer Cone Mills. In optical networking he controls 360 Networks and Group Telecom and has stakes in Level 3 and Dynegy. At presstime, Ross was closing his biggest investment yet: a $1.5 billion acquisition of bankrupt Bethlehem Steel. When Bethlehem's assets are pooled with those of LTV and Acme--steel producers Ross brought out of bankruptcy last year--his International Steel Group (ISG) will be responsible for more than 20% of U.S. production.
Obviously, those are not growth industries, but Ross still manages to make huge profits on them. His original private-equity fund has averaged an annual return of 30.1% since he started it in November 1997. His second private-equity fund, which was launched in February 2002, had an eye-popping 179% return through the end of last year. His hedge fund has averaged an 11.7% annual return from its inception in June 2001 through the end of 2002, vs. just 4.4% for the Hennessee Distressed Index. The total value of Ross's holdings: $3 billion.
Ross succeeds in these risky ventures because, as sometime partner and occasional adversary Carl Icahn puts it, "he has the ability to see opportunities other investment bankers miss." That prescience is not a supernatural gift, but rather the product of intense study and preparation. "We spend a lot of time trying to figure out which industries will go bad a year from now," says Ross, "and then within that universe, we try to figure out which companies are salvageable."
At age 65, Ross remains intimately involved in every deal. No investment is made without his approval. When he isn't jetting off to negotiations or bankruptcy court proceedings, he stays at his desk, where assistants often deliver breakfast, lunch, and dinner--along with endless cups of coffee paired with glasses of water.
He does make time for one extracurricular enthusiasm: art. Ross amassed an impressive collection of 19th-century American paintings but had to part with it to finance his divorce from second wife Betsy McCaughey Ross, the former lieutenant governor of New York. The divorce was messy, coming after Ross withdrew the funding behind his wife's bid to unseat New York Governor George Pataki. Nasty fights are endemic to bankruptcy work, and his business associates praise Ross for his unusual ability to maintain his composure in the heat of battle. As for his ex-wives, Ross says that he is on cordial terms with both. "People make mistakes," he says, with his trademark equanimity. "The only thing you can do is try to correct them, absorb whatever hit, and go on to the next thing." Ross is as good as his word: He now collects contemporary photography.
On a warm March afternoon Ross is seated at the round conference table in his corner office, describing his role in the restructuring of Revere Copper & Brass. He is dressed in his customary dark-gray suit, white shirt, and patterned tie. His left hand rests lightly on his BlackBerry text messenger; his right is within reach of the phone. Every few minutes he interrupts his narrative about Revere to take a call, fire off an e-mail, or accept a fax from one of his two assistants, who are stationed within easy shouting distance outside his open office door. After each interruption, he returns to his story exactly where he left off, filling in the minutest details. All of which would be less remarkable if the Revere deal hadn't occurred nearly 20 years ago.
Ross's fixation on failure began with Revere. At the time he was working at the American subsidiary of Rothschild, the venerable European investment bank. Michael Milken and his cohorts at Drexel Burnham Lambert had recently revolutionized the debt markets with the use of high-yield "junk bonds" to finance leveraged buyouts. Unlike most of his colleagues, Ross recognized that many of the volatile, highly leveraged companies would collapse. When they did, bondholders would be forced to accept pennies on the dollar for their investment. "Bondholders are like workers in a factory," says Ross. "On their own they have no leverage. But if someone pulls them together, they can negotiate with anyone."
That someone was Ross. When Revere filed for Chapter 11, a group of the company's creditors became Ross's first clients. He became the foremost bankruptcy advisor on Wall Street, participating in the most infamous bankruptcies and restructurings of the late '80s and early '90s, including TWA, Donald Trump's Taj Mahal, and even Drexel itself.
As the flood of bankruptcies slowed in the mid-1990s, Ross's contrarian instincts led him to other venues. At the height of the Asian financial crisis, Ross began investing heavily in South Korea and Japan. He bought bonds that few would touch and pocketed huge returns when the International Monetary Fund announced a multibillion-dollar bailout of South Korea's failing economy. In the U.S., Ross ignored the Internet boom, stubbornly seeking out failing companies. He still managed to achieve dot-com-like average annual returns from 1998 and 2000 in old-line companies such as Plains All-America Pipeline (657%) and power producer AES Thames (787%).
In 2000, Ross bought his fund from Rothschild and started his own private-equity firm. Topflight institutional investors, including Calpers, GE Capital, and Goldman Sachs, deposited money with Ross, and his firm now manages $1.6 billion. Charles Baillie, managing director of Goldman's private-equity group, said he chose Ross over other distressed debt funds last summer in part because of his skill in acquiring LTV Steel. Says Baillie: "Very few people could have pulled that deal off."
When Ross scans the landscape for redeemable failures, the first thing he looks for are industries with the largest concentration of high-yield financing in a given year. That is Ross's red flag. Experience tells him that those industries are desperate for funds and that when the debt matures, many of the companies will struggle to meet their interest payments, opening the door for Ross to buy their debt at a discount. Once he identifies the industries, Ross evaluates their potential for structural change. "It's a Darwinian thing," he says. "The weaker parts get eliminated, and the stronger ones come out stronger. Our trick is to figure out which is which, try to climb on to the ones that can be made into the stronger ones, and then try to facilitate the demise of the weaker ones."
Take Burlington, the North Carolina textile manufacturer. Ross first identified Burlington as a target in early 2001, but before he swooped in with an offer to purchase two years later, he made profitable transactions on its downhill slide. In 2001 he began to sell the stock short through his hedge fund, while at the same time carefully vetting the balance sheet, which he discovered was studded with valuable assets. When the company filed for Chapter 11, he pounced, buying up all the outstanding bonds, which had plummeted below 11 cents on the dollar. "The only reason we had enough courage and intellectual conviction to buy all that paper," says Ross, "was that we had been so familiar with the company for so long." A year later the value of the bonds had climbed to around 30 cents.
At that point Ross could have thrown his support behind a buyer and pocketed his profit. And, in fact, Warren Buffett made an offer to acquire Burlington for $579 million, which would have given debtholders 35 cents on the dollar. But Ross is not afraid to play chicken. As the company's largest debtholder, he rejected the offer as too low and persuaded a Delaware bankruptcy court to consider other offers, including one from his own firm.
Ross clearly enjoys outmaneuvering the opposition--nobody can trump his knowledge of bankruptcy law--but with his foray into steel, he's playing a different game. He's trying to create a new company from the remains of three aged hulks and to succeed in an industry that last year had 100 million tons of excess capacity worldwide.
He was willing to take that gamble--his biggest ever--because he figures steel "is too vital to the economy and national security" for the government to allow domestic production to disappear. So far, his instincts have proved impeccable. A month before Ross reopened the furnaces at shuttered LTV, the Bush administration imposed a 30% tariff on foreign steel.
By the time he made his bid for LTV, the company had deteriorated to the point that he was viewed by many as a savior. LTV was in liquidation, so Ross didn't have to assume expensive pension and health-care costs. Still, he managed to get the wholehearted support of the United Steelworkers Union by hiring laid-off steelworkers and cutting jobs from the executive suite.
To restart the 6.5 million--ton operation with just 3,000 workers--a third of its former staff--Ross handpicked a new management team from highly regarded mini-mill Nucor Steel. He set production targets and ordered bonuses for workers who met them. Since ISG took charge of the mills, the time it takes to produce a ton of steel has fallen from 2.5 man-hours to less than one. Last year the average worker got a 20% increase in base pay.
Ross's chummy relationship with the union proved valuable when he made his bid for Bethlehem. The company was in Chapter 11 and had 12,000 workers on the payroll. Ross proposed cutting the staff to 8,000 and making workers' contracts similar to those at ISG. More than 96% of union members voted in favor.
ISG is now the most efficient integrated-steel company in the industry. It produces hot-rolled steel for $250 a ton--about half the cost of production at the former LTV and Bethlehem. (World prices currently hover at $300.) Yet Ross still faces enormous obstacles. He must integrate Bethlehem's ten million tons of capacity into this new model. He'll be facing an even bigger competitor soon: U.S. Steel just got approval to buy bankrupt National. And there's still the problem of foreign competition: Japan, Russia, and Mexico produce hot-rolled steel for comparable prices and the European Union is contesting the legality of the U.S. tariff at the World Trade Organization.
Not surprisingly, the man of steel appears unperturbed. Ross thinks ISG, with its new efficiencies, will be able to compete even if the tariff is removed. He is leaving the day-to-day management of ISG to his executive team and is restlessly searching for new dance partners in real estate, energy, and other sectors. They may look sturdy on their feet now, but as soon as they dip, Ross will be there to catch them.