Blackstone Partners To Forge Steel Venture –

The Blackstone Group and Veritas Capital Management last month agreed to merge their steel mills with a USX-U.S. Steel Group- and Kobe Steel-owned U.S. mill to spread overhead costs and better manage supply and demand. The unusual move comes as an attempt to combat a supply glut in the steel bar industry.

According to Robert McKeon, a Veritas partner, Kobe’s decision to focus on its Japanese steel business was the lynch pin that brought the transaction together.

The move is a three-way merger of mills that manufacture steel bars. Blackstone and Veritas both already own stakes in Republic Engineered Steels and Bar Technologies, although the mills run as separate companies. After the merger, Blackstone will own approximately 50% of the new company, Veritas will own a 20% stake and USS/Kobe is obtaining a 30% stake and is contributing its lone U.S. mill.

Chase Manhattan Corp. has agreed to lead an $800 million debt facility that includes a $300 million revolving credit line. The lenders also will raise much of the debt facility in the 144-A market.

Prior to the inking of this deal, Blackstone and Veritas already were set to merge their steel bar operations in the fall. However, the merger was delayed when the public debt markets tightened, Mr. McKeon said.

The new company, which will be called Republic Technologies, International will generate $1.6 billion in sales and control about 25% of the market for steel bars should it pass Fair Trade Commission muster, Mr. McKeon said.

Steel bars, which represent about 10% of the U.S. steel market, are used to make solid structural parts like steering columns and axles.

Deal Attracts Regulatory Interest

The partnership has raised some interesting questions for the FTC, which is examining the merger. Should the deal close, Blackstone-owned American Axle & Manufacturing, a company with $2 billion in revenue, would be able to buy much of its steel from Blackstone-controlled mills (it already buys steel from the USS/Kobe mill and its own mills).

The merged company in turn could sell more of the steel it produces to American Axle so the steel bar company could better control its production levels, sources close to the deal said.

This could prove a particular boon to Republic and Bar Technologies, which had been producing more steel than the market would bear. Republic has not registered a net income in several quarters, and Bar Technologies also has been recording negative net income numbers. Partners at Blackstone declined comment.

Blackstone and Veritas believe the deal will pass FTC approval because General Motors Corp. and Ford Motor Co.-American Axle’s main customers-will not buy overpriced axles, sources close to the deal said. The deal is expected to close this summer.

Republic and Bar Technologies should benefit from the $500 million USS/Kobe has invested in its modern mill. The group will close several of Republic’s older mills and will work with the better facilities. The new operation also will be able to pay less for scrap metal because of its increased buying power and reduced overhead, Mr. McKeon said.

Blackstone made its initial investment in Republic in early 1996 and has committed about $130 million to both steel mills. Veritas has committed $90 million to its steel operations since it first invested $26 million in 1993.