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FINANCIER'S BET ON STEEL PAYS OFF BIG

Wilbur Ross sure knows how to stir up a whirlwind -- and the steel industry will never be the same because of it.

Ross, the financier who in less than three years cobbled together his International Steel Group by acquiring bankrupt or distressed steel makers like LTV Corp. and Bethlehem Steel Corp., turned the American steel industry on its heels.

He negotiated cost cuts with unions. He pulled off the first stock offering by a U.S. steel maker in seven years. And he did it with steel makers that had shed costly retiree pension and benefit obligations through bankruptcy, creating hardship for retirees but giving a huge boost to the firms' finances.

After last week's deal to sell ISG to Indian-born billionaire Lakshmi N. Mittal for $4.5 billion, Ross is likely to set off another wave of change that will ripple through the steel industry.

"We think that this is the wave of the future -- powerful companies, vertically integrated and with strong financing," Ross said in a conference call after the deal was announced. "I think this will provoke a lot of change in the steel industry, just as ISG's approach provoked a lot of change in the American steel industry."

Steel is quickly becoming a worldwide business. Once the deal is wrapped up early next year, Mittal Steel will be the world's biggest steel maker, producing about 57 tons of steel a year at facilities that span 14 countries in four continents.

Mittal will be the No. 1 steel producer in North America and Africa and No. 2 in Europe. And thanks to the substantial mineral resources that Mittal controls, it will be virtually self-sufficient in its coke and iron ore needs, Ross said.

"These transactions dramatically change the landscape of the global steel industry," Mittal said.

These days, size matters more than ever. That's why analysts predict the deal will spur more consolidation in an industry that many believe is far too fragmented, even after, by the American Iron and Steel Institute's count, 35 U.S. steel makers went bankrupt between 1997 and 2002.

Arcelor SA, which itself was cobbled together three years ago in a merger of three European steel firms to form what currently is the world's No. 1 steel maker, reacted to the Mittal deal by predicting that the industry will be down to five or six huge global firms in five to 10 years.

The consolidation also could help other big American steel makers, including Nucor Corp. and U.S. Steel, by giving them more leverage to charge higher prices to auto makers and other big customers, analyst John Tumazos of Prudential Equity Group wrote in a research note.

While Mittal officials expect to wring even more costs out of the combined company, they ruled out plant closings, which is a relief to workers at ISG's galvanized products division in Lackawanna.

"None of the facilities are being targeted, at all, for reduction or a shutdown," said Rodney Mott, the ISG chief executive who be in charge of the combined company's U.S. operations. "We're looking for opportunities to increase capacity."

For Ross and ISG's shareholders, the well-timed foray into steel is paying off handsomely. After snapping up some of the industry's most prominent distressed assets in six major deals for a little more than $2 billion, the economy promptly took a turn for the better and the Chinese economic boom caused a spike in demand. Consequently, steel prices more than doubled to some of their highest levels in 20 years.

With a Mittal's bid valued at $42 a share, ISG is commanding a price that's 42 percent higher than its closing price before the deal was announced and 50 percent more than its initial public offering price 10 months ago.

Now Ross can sit back, count his profits and watch the fallout from his lucrative three-year foray into steel. "It will be fascinating to see what kind of competitive response the industry has," he said.

e-mail: drobinson@buffnews.com

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