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| Wilbur Ross |
Parlaying a $400 million investment in the steel industry into a $4.5 billion return in a three-year period far exceeded Wilbur Ross' expectations. Now, fresh off the sale of International Steel Group to Mittal Steel Co., Ross, chairman and ceo of WL Ross & Co., has high hopes for the coal and textile industries. He is also considering the auto and auto-parts industries. "We haven't yet made any investments in it. But it's certainly something we've been looking at," said Ross. For the full interview, click here. Distressed Focus
Wilbur Ross, WL Ross & Co.
Wilbur Ross is the chairman and ceo ofWL Ross & Co., a private equity firm specializing in distressed investments. Ross started at investment bank Wood Struthers & Winthrop before joining Rothschild, where he spent 24 years as a bankruptcy advisor becoming known as the "King of Bankruptcy." At Rothschild he was involved in reorganizing Texaco and also raised a fund to invest in distressed assets. In 2000 he formed WL Ross. He has since been at the center of some of the most dramatic and high-profile turnarounds including International Coal Group,International Steel Group and International Textile Group.
What do coal, steel and textiles have in common and how do you choose your targets?
They have several things in common. At the time when we entered they were very much out of favor, with balance sheet and operating problems and not very many other people interested because you are dealing with distressed securities. Also, steel and textiles had problems with foreign competition.
We try to do anticipatory research and we often study things long before they actually go into bankruptcy. We've been studying coal, for example, since about 1998 and we finally got into it big in the past year. We try to do a lot of homework in advance to make sure the industry can be turned around.
Do you do your own research?
We tend to use a lot of our own research. But we also bring in specialized consultants that are experts in that business. In the case of coal we use Weir International Mining Consultants and for textiles Carl Marks Consulting Group. In the case of steel we use World Steel Dynamics. We supplement our own efforts with consultants in those firms and the managers that we tend to bring in.
You enter seriously distressed situations when it seems nobody else would. What value do you see in them?
What we try to do is to buy them fairly close to their liquidation value so that there isn't a tremendous amount of downside risk and then the upside potential becomes more a question of what can we do within the new management team and the new capital structure to add value to the situation.
What do you focus on during a restructuring/turnaround situation?
You have to deal with the various financial constituencies because by definition there is never enough value to turn around to satisfy all of the claimants. So at one level its financial negotiation. At another level, it's legal negotiation. Bankruptcy is basically one gigantic litigation so there is a very heavy amount of working with lawyers. There are often very major accounting issues, sometimes of fraud but almost always regarding financial controls. There's a lot of work on the financial side and generally on the labor side there are also regulatory issues.
Have you ever ended up crushed in a distressed debt situation?
No, because we normally are in relatively senior debt positions rather than in a more junior position. So it is possible that we may not be 100% happy with the recovery that we get, but we never get crushed because we are relatively senior.
Are you finding it difficult to find distressed assets?
Not really, because the new investors in distressed come out at it more from the trading side. They often are not in a position to change the company themselves. They are in a good position to evaluate what might be the value of the reorganized company. But where there are serious operating problems, which is usually the case, it can get very tricky for people who are not in a position to fix the problems to figure out how much they should pay. So we feel we have a good advantage in the situations that are a combination of a bad balance sheet and a bad business.
What's the most interesting situation you've been involved with?
The most interesting?...God, they are all interesting. Certainly the one that exceeded our expectations most dramatically was the steel company because it turned around faster, and more dramatically even from where we had expected it to. It's certainly the most exciting thing that we've done, and particularly because it was so large.
We and our co-investors put in around $400 million and that has become about $4.5 billion in roughly a three-year time period. We didn't invest in any paper in that situation. We just bought companies out of bankruptcy, companies in which we had no investment.
The first one--LTV Corp.--closed on April 2002. Then we acquired Acme Steel in October 2002, Bethlehem Steel in May of 2003 and then in 2004 we acquired Georgetown Steel Co. and Weirton Steel Co. It turned out that each of those four, in addition to LTV, had no debt instruments and we just bought them in a 363 sale. In many of the cases we made an alliance with people that did have a lot of the debt but we didn't own any of the debt ourselves.
[Ross rolled up the companies into International Steel Group. In October, he agreed to sell the business to London steel magnate Lakshmi Mittal'sMittal Steel Co. for $4.5 billion. The acquisition was approved by shareholders last week.]
How did you work with the Unions?
We made a very big contract with the unions, which was a major breakthrough, radically changing the relationship between labor and management. It reduced from 32 to 5 the number of job classifications that permitted outsourcing of certain functions and it provided in general much more flexible work rules than had been there before. And the quid pro quo for that was an incentive bonus system based partly on two systems: one based on the productivity of the individual units of equipment, the other based on the overall profitability of the company. So now our steel workers get the same basic pay as any other steel worker, but because the bonuses amounted to $250 million last year, we believe they are the best paid steel workers in the industry. The purpose of the negotiations was to increase productivity so the old LTV required two-and-a-half man hours to make a ton of steel. We make a ton of steel in slightly less than one minute.
Do you invest in Europe?
In November 2003 we made a joint venture with a private equity group in Paris called Investors In Private Equity (IPE). They are a team of eight professionals, headed by Philippe Nguyen, who comprised the private equity team at Crédit Lyonnais. We are very happy with the progress that we've made so far. Europe is a very big place and a lot of the countries, particularly Germany and France, are experiencing some difficulties right now. Therefore it becomes logical for us to look at it. For example, we already have invested in the air cargo and the ski resort and leisure park sectors.
Your investment strategies have recently generated controversies, specifically among second-lien holders. What's your view?
Often the people that are of a more junior class feel that by making a big clamor they can induce you to settle with them and get more value than they would be statistically entitled to. And sometimes, if it's not too expensive, one does that. If their demands become too aggressive then you just fight it out with them and get rid of them.
Fine Food, Friends & Photography
Ross, a Weehawken N.J.-native, holds an A.B. degree in English Literature from Yale University. With his sights on Wall Street, he progressed to Harvard Business School for his M.B.A, where he graduated with distinction.
The financier, who likes to spend time at his Palm Beach house, has an appetite for steak and when in New York frequents Danielle's, Le Cirque and Elios. Ross hopes to be "friends with everyone" in the distressed market, but admires Carl Icahn and Warren Buffet, whom he considers "very smart."
Ross is married to Hilary Geary and has two grown-up daughters from his first marriage. In his very limited free time, Ross plays tennis and collects photography from his favorite artists Mariko Mori, Robert Mapplethorpe, Matthew Brady and Edward West.
