USW: Esmark in violation

Successorship, bid clauses invoked in union’s review of deal from India’s Essar

By PAUL GIANNAMORE, Business editor
STEUBENVILLE — The United Steelworkers union finds the shoe is on Esmark’s other foot regarding the union’s right to bid and successorship rights in its contract with the steelmaker.

The Steelworkers are demanding Esmark repudiate agreements it entered into with India’s Essar Steel Holdings.

Esmark announced it had reached a material agreement April 30 with Essar on a $17 per share tender offer to buy Wheeling-Pittsburgh Steel Corp. and Esmark’s Steel Service Group, saying the USW had 52 days to mount a counter bid under its succession rights terms in its contract with Wheeling-Pitt.

On Friday, David McCall, director of USW District 1, which includes Wheeling-Pitt, said the union would use its contractual rights to prevent the Essar takeover as it had when it favored Esmark over Brazil’s CSN in 2006.

Esmark entered into a set of loan agreements with Essar totaling $110 million to repay a federally backed loan that helped W-P emerge from bankruptcy in 2003, as well as for continued operating capital while finalizing the deal. Filings with the Securities and Exchange Commission note Essar would be paid $20.5 million if a third party bought Esmark.

The USW says that and other terms violate the union’s right to bid clause because Esmark closed on the financing and entered into a memorandum of agreement with Essar without providing the Steelworkers appropriate notice and an opportunity to bring forward an alternative proposal.

Esmark spokesman Bill Keegan said Friday afternoon that the company was aware of the Steelworkers statement and would issue a response Monday.

McCall said Friday, “We will take whatever action is necessary to protect these rights. We used our contractual protections to prevent CSN from taking over Wheeling-Pitt, which opened the door for Esmark to acquire the company. You would think they would have learned something from that transaction.”

Leo Gerard, president of the USW said, “It is quite frankly offensive that after the support Esmark received from the Steelworkers to get control of the company in the first place that they would simply ignore the agreement they made with us. This will not be allowed.”

The union had used similar language in the summer of 2006 supporting Esmark’s reverse hostile takeover for Wheeling-Pitt, saying the USW “would use every means at the union’s disposal” to defeat the proposed CSN takeover.

The union had filed a grievance over the CSN offer being voted upon at the November 2006 shareholders meeting. CSN’s offer was pulled and that meeting instead was a referendum to elect Esmark’s board or the W-P board that supported the CSN offer. Esmark won and took over management of W-P at the end of November 2006. The merger was completed at the November 2007 board meeting.

As it was fighting to gain control of Wheeling-Pitt’s board in the summer of 2006, Craig T. Bouchard, Esmark’s president, said the USW was critical to Esmark’s success at Wheeling-Pitt.

“Great companies are made by the people who do the actual work, not by anyone else,” he said in August 2006. “I cannot think of even one case of a company in the steel industry succeeding while at war with the Steelworkers.”

A copy of McCall’s letter to James P. Bouchard, chairman and chief executive officer of Esmark and brother of Craig Bouchard, was obtained Friday. The letter indicates the union finds Esmark’s actions as “both willful and designed to deprive the USW of the right to propose a bid on equal terms because the company waited until it had executed the memorandum with its $20.5 million break-up fee and closed on related financing before providing the USW notice under the Right to Bid Clause.”

The letter states the company was considering accepting offers for transactions several times since Feb. 25, failing each time to notify the USW.

“You have improperly placed the USW at a significant disadvantage in preparing its competing bid by entering into the memorandum and closing on related financing,” the letter to Bouchard states. “Any decision the company makes will be tainted by management’s granting ‘stalking horse’ benefits to Essar and incurring the costs of not proceeding with the Essar transaction.”

The letter states the union wants to meet immediately with Bouchard but will pursue legal action if a satisfactory resolution is not reached. The union also states to Bouchard that it is concerned with Essar’s “apparent knowledge of and complicity in the company’s breach” of the contract’s right to bid terms and note that the deal with Essar cannot be completed if a contract is not reached between the union and the USW, under the successorship terms of the contract.

The union makes a number of requests for information from Bouchard in an accompanying request with the letter.

Esmark did not disclose the $20.5 million fee in press releases announcing the tentative deal with Essar. Also disclosed in SEC filings is a proposal that would allow Essar to acquire up to 3 million shares of Esmark stock at $12.50 a share if the firm is sold to a party other than Essar.

Since announcement of the Essar deal, Esmark stock had been trading in the $16 range, but had dropped to $14.63 late Friday.

Essar’s loans to Esmark include $79 million to repay the federally backed loan and $31 million to Esmark Steel Service Group.



(Giannamore may be reached by e-mail at pgiannamore@heraldstaronline.com.)