Wheeling-Pitt Chairman Reaches Out to Shareholders Regarding Esmark
11/08/2007 - Wheeling-Pittsburgh Chairman James P. Bouchard issues a letter to shareholders regarding the upcoming combination with Esmark Inc.
Wheeling-Pittsburgh Corp. Chairman James P. Bouchard issued a letter to shareholders regarding the upcoming combination with Esmark Inc. The letter is included below, in its entirety.
Dear Shareholders,
On November 27, 2007, Wheeling Pittsburgh Corp. will hold a special shareholder meeting to vote on the combination with Esmark. This vote will determine the future of our company. I am writing to encourage you to vote for the proposed merger between Wheeling-Pitt and Esmark because I believe it to be in the best interests of all shareholders. Below, I will explain why I feel this way and detail our aggressive plans to return the steelmaking operations of New Esmark to profitability in 2008.
Let me first describe why the combination with Esmark needs to be completed. In short, Wheeling-Pitt cannot continue to be viable as a standalone entity without a stronger balance sheet, dramatically reduced cost structure, and a broader, larger and more profitable customer base.
A Stronger Balance Sheet
Given the cyclical nature of the steel industry, maintaining a strong balance sheet is a must. During the last two decades the landscape became littered with bankrupt steel companies that were not able to survive the downturns in the marketplace. Wheeling-Pitt has too much debt. The merger will address this problem by immediately bringing fresh capital into New Esmark of at least $50 million and as much as $200 million. This would not be possible without Esmark's largest shareholder, Franklin Mutual Advisers, which has agreed to guarantee that New Esmark will receive $200 million for the issuance of shares of New Esmark in connection with the purchase rights feature of the combination.
The addition of Esmark also improves the balance sheet. Esmark continues to be profitable, has no long term debt, and will deliver a net positive working capital balance to New Esmark of $100 million.
All in, with the cash coming in, permanent financing to be entered into after the merger, and conversion of most of the convertible instruments we hope to reduce the debt of the combined companies from approximately $525 million at this time to approximately $275 million by year end. It will be a pleasure to see a Wheeling-Pitt balance sheet that is more equity than debt.
Further, in July of this year, a West Virginia jury unanimously awarded the company and our joint venture, Mountain States Carbon, $219.85 million in a lawsuit against Massey Energy Co. and its subsidiary Central West Virginia Energy Co. Massey has publicly stated that it will appeal the verdict and we will vigorously defend the jury's decision if appealed. Our balance sheet will be additionally enhanced when and if we recover any amounts, including interest that is accruing during the appeal process.
Plan to Lower Costs
The steel manufacturing sector continues to experience rising costs of energy, raw materials, labor and transportation at a time that steel prices remain soft and flat. The steel industry itself could be viewed as having survived a mild recession this past year. It appears to us that demand for flat rolled products is off roughly 10-15 percent in the U.S. from last year. In times like this, when selling prices and demand are low, and raw material and other costs are increasing, the only producers who can be profitable are those that have low cost structures.
Wheeling-Pitt currently has neither the raw material advantages of the integrated producers nor the labor and technical cost structure of the mini-mills. Although we took a number of steps to lower costs at operating units this past year, the increased cost of scrap for our Electric Arc Furnace (EAF) and the rise in energy and raw materials required for our blast furnace operation overwhelmed our efforts to reduce operating expenses. The Esmark merger and the liquidity (and balance sheet) it brings will provide time and capital for us to continue to attack our cost structure.
Of course, we can't influence the price of iron ore, scrap or natural gas. These costs will remain high or go up in all scenarios we can envision. Similarly, labor rates and transportation costs are not going down. They are going up. Wheeling-Pitt has a plan which we believe will lower our dependence on each cost category. Our medium term corporate goal is to reduce our overall operating cost structure by $150 million per annum. The cost rationalization process has already begun.
Our plan consists of a two-step transition: (1) Immediate Restructuring for 2008 Profitability, and (2) Strategic Investment Considerations for Long Term Profitability.
Restructuring for 2008 Profitability
Strategic Investment Considerations for Long-Term Profitability
We also believe that combining our steel operations with those of Sparrows Point makes sense. After E2's acquisition of Sparrows Point, we will pursue a combination with the new owners of Sparrows Point, subject to approval of our board and shareholders.
Linking Distribution and Production
Our underlying strategy is to change the steel supply chain model in North America by combining a mill with service centers. This is the model used and employed by successful companies in their operations in Europe, such as ArcelorMittal and Corus. The steel operations of Wheeling-Pitt, which is essentially a spot player with a small customer base, will benefit by creating more customers for its products. Esmark is a steel distribution company with a customer base of approximately 2,000 customers which stretch across the states of Illinois, Wisconsin, Indiana, Michigan, Missouri, and Ohio. We believe that steel consumption in these states comprises a significant part of the steel consumption in the United States. The distribution operations will benefit by allowing the service centers to offer customers faster, more efficient and just-in-time service. Ultimately, we believe this combination will enhance shareholder value.
Finally, I cannot pass up the opportunity to point out how valuable our partnership with the USW is to accomplishing our plans. The USW and our employees believe in our strategy. They care very deeply about the success of New Esmark and they are helping. With continued support, I am convinced we have the right people, partners and strategy to become a low cost "big 4" producer of steel in North America.
I am also thankful to Esmark and its largest shareholder, Franklin Mutual Advisers, for remaining steadfast in their determination to build this company into something very special.
We have through the merger agreement provided each shareholder of Wheeling-Pitt the ability to also share in our strategy to change the steel supply chain model in North America through the right to purchase shares of New Esmark stock at $19 per share. These purchase rights will not only improve the capital structure of our company, but they provide Wheeling-Pitt stockholders with the opportunity to reduce dilution and participate in the upside of the strategy to combine distribution with production.
I ask for your continuing support and to vote "FOR" the merger on November 27.
Sincerely,
James P. Bouchard
Chairman and Chief Executive Officer
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