The Unscrupulous Suitors

How Kaiser Steel arrived at this sorry state is an American tragedy.
Forbes^[110]

While Local 2869 was fruitlessly searching for friends in high places, Kaiser Steel was like Ulysses' wife Penelope: haplessly pursued by a hundred unscrupulous suitors. Despite the reluctance of other steelmakers to assimilate Fontana to their operations, there was no shortage of corporate predators eager to stripmine the company's financial reserves. Following the sale of the offshore mineral properties, the company was temporarily awash in liquidity—by one estimate, almost one-half billion dollars.^[111] Many Wall Street analysts believed that the plant was undervalued. With shrewd management, they guessed that the modernized core could be re-configured as a profitable "minimill," fabricating imported slabs or local scrap.^[112]

While the new CEO (the sixth in seven years), Stephen Girard, feuded with the Kaiser family over the terms of sale, desperate unionists and stockholders looked toward San Francisco investor Stanley Hiller, who was rumored to represent billionaire speculators Daniel Ludwig and Gaith Pharaon. Hiller's offer of $52 per share appeased the Kaiser family, but Girard, trying to retain control over a cash hoard still estimated at $430 million, broke off negotiations. The Kaisers, backed by the union (which believed it could interest the Hiller group in its ESOP concept), rallied other large stockholders to override Girard.^[113] By March 1982, however, when Girard resumed talks with Hiller, the write-down costs of phased-out steel facilities, originally estimated at $150 million, were admitted to be nearly $530 million, including $112 million in employee termination costs. The contingent liabilities in health and benefits for the laid-off workforce seemed especially to overawe the Hiller group, who, to the consternation of unionists and stockholders, abruptly retreated from the field on 11 March.^[114]

The company promptly moved to claim tax write-offs by auctioning its primary steelmaking equipment for scrap: a final blow that killed any hope of an ESOP-based resurrection.^[115] In late October 1983 the last heat of Eagle Mountain iron ore was smelted into steel; for another month a skeleton crew of 800 (out of a workforce that once numbered 9,000) cold-

rolled the remaining slabs into coils, sheets, and plate. At 4 P.M. on Saturday, 31 December, Kaiser Steel Fontana died.^[116]

While thousands of Kaiser workers and their families mourned the sinking of California's industrial flagship, sharks in grey flannel suits circled around the undervalued assets of Kaiser Steel, no longer hemorrhaging $12 million per month in operating deficits. The first to strike was corporate raider Irwin Jacobs of Minneapolis—known in the trade as "Irv the Liquidator"—who had become the leading shareholder after the withdrawal of Hiller.^[117] Scared that he would simply "gut" the company, Kaiser Steel management swung behind the rival bid of Oklahoma investor J. A. Frates. Then, as Forbes later reported, "Monty Rial suddenly appeared, uninvited and unknown," swaggering like a corporate Butch Cassidy and brandishing the high-powered law firm of Wachtell, Lipton, Rosen and Katz. Posing as a coal baron from Colorado (though his holdings had never actually produced a ton of coal), Rial dealt himself into the Kaiser Steel takeover game by boasting that he could profitably restructure the company around its billion tons of high-grade coal reserves in Utah and New Mexico.

What Jacobs and Frates didn't realize, or bother to find out, was that Rial was simply bluffing. While laying siege to Kaiser's half-billion-dollar equity, Rial's "Perma Group" was itself less liquid than some of the Fontana bars in which the ex-steelworkers groused. According to Forbes , the "Perma Group couldn't even pay its copying bills. A local copy shop was pursuing the company to collect a past-due $1,200, which Perma paid in twelve monthly installments." No matter: an impressed and incredibly gullible Frates admitted Rial ("it rhymes with smile") as a fifty-fifty partner. In February 1984 they outbid Jacobs to take control of Kaiser Steel, offering $162 million in cash and $218 million in preferred stock.

The most viable sections of the Fontana plant were immediately sold off—for $110 million (exactly the amount that Kaiser had borrowed from the RFC in 1942)—to a remarkable consortium that included a Long Beach businessman, Japan's giant Kawasaki Steel, and Brazil's Campanhia Vale Rio Doce Ltd. In a mindbending demonstration of how the new globalized economy works, California Steel Industries (as the consortium calls itself) employs a deunionized remnant of the Kaiser workforce under Japanese and British supervision to roll and fabricate steel slabs imported from Brazil to compete in the local market against Korean imports. Derelict Eagle Mountain, whose iron ores are five thousand miles closer to Fontana than Brazil's, has meanwhile been proposed as a giant dump for the non-degradable solid waste being produced by the burgeoning suburbia of the Inland Empire.

While Fontanans were trying to absorb these strange economic dialectics, Rial—the guy who couldn't pay his Xerox bill ten months before—was wresting control of the company from Frates (and transferring its headquarters to Colorado). His method of financing the takeover was ingenious: he sold to Kaiser Steel, at incredibly inflated prices, additional coal reserves which he owned and which it scarcely needed. The impact of the two back-to-back leveraged buyouts was little short of devastating. The original half-billion-dollar cash hoard was reduced to $500,000 as the raiders ran away with their spoils.^[118] Moreover the company was hopelessly saddled with new, and utterly unnecessary, debt. As the rest of the business press was celebrating the contribution of corporate raiders to making the economy "leaner and greener," two Forbes journalists saw a different moral in the story of Frates and Rial looting Kaiser Steel without spending a penny of their own money:

Frates staged a classic, no-money-down, 1980s takeover. Kaiser Steel changed hands for $380 million. Where did the money come from? Not from the pockets of the people doing the takeover. The Frates Group used $100 million borrowed from Citibank and $62 million of Kaiser's own cash to pay $22 a share to Kaiser's stockholders, and gave them $30 [face value] of preferred stock for the rest of the price. Thus, for $162 million that wasn't his and $218 million of paper in the form of Kaiser Steel preferred, Frates took over the company. Naturally, Frates took millions of dollars in fees and expenses, so his net cash investment was less than nothing.

[To buy out Frates] Rial traded illiquid assets to Kaiser for land and cash. . .. Kaiser shelled out $78 million for the same Perma assets Frates valued 18 months earlier at only $65 million. What's more, because the SPS [coal contract] was valued at only $12.2 million this time around, the value of Rial's coal properties must have risen to $65.8 million—a 65% increase. . .. When the dust settled Frates had $20 million of cash, a $5 million near-cash receivable . . . and $15 million of Kaiser land. . .. Rial hasn't stinted himself, however. He took $2.4 million in salary last year.^[119]

Rial's swashbuckling depredations finally provoked a backlash from Kaiser Steel's preferred stockholders, who allied themselves with Bruce Hendry, the famous scrapdealer in distressed companies (he had previously picked over the remains of Erie-Lackawanna and Wickes).^[120] Forcing Rial aside as CEO in 1987, Hendry proposed to rescue the stockholders' equity at the expense of the ex-Kaiser workforce. Borrowing a leaf from Frank Lorenzo, Hendry plunged Kaiser Steel into a chapter-eleven proceeding in order to liquidate worker entitlements.

During the shutdown in 1983, workers had taken some solace in the assurance that cash-rich Kaiser, unlike some bankrupted Eastern steelmak-

ers, would always be able to honor its obligations. Now, four years later, six thousand outraged former employees watched as Hendry cancelled their medical coverage and pension supplements, while transferring part of the burden of their pension funcling to the federal Pension Benefit Guarantee Corporation. In order to deflect worker anger, he also initiated lawsuits to recover the $325 million in Kaiser reserves allegedly "stolen" by Frates and Rial through their buyouts.^[121] At the moment of this writing, three years further on, most of the benefits remain unrecovered, the various lawsuits have disappeared in a judicial logjam, and thousands of ex-steelworkers and their families have endured further, unexpected hardships.