A New York hedge fund bidding to merge Stelco and Algoma into a new steel company says it will not pay Algoma’s massive pension shortfall.
For leaders of the United Steelworkers union, that threat has toughened their position against the bid of KPS Capital Partners.
The union, which speaks for 20,000 retirees from U.S. Steel Canada plants in Hamilton and Nanticoke, has promised to veto any potential sale of the company that doesn’t address its key demands to protect pensions, jobs and retirement benefits.
Gary Howe, president of USW Local 1005 in Hamilton, said while KPS president Mike Psaros identified only the Algoma pension and refused to answer questions about plans for the former Stelco, “You have to believe they’re thinking of the same thing here.
“KPS is not our choice for getting these plants,” he added. “We know there are other bidders out there who are more aligned with our goals.”
Both U.S. Steel Canada, the former Stelco, and Essar Steel Algoma are under creditor protection and seeking buyers for all or part of their operations. Psaros told the Globe and Mail Wednesday his firm is a bidder for both companies and plans to merge them into a new firm.
Essar Global, the India-based conglomerate that owns Algoma, has been effectively eliminated as a bidder for the restructured company. It is, however, said to be in the running to acquire Stelco. Sources have said a third potential buyer is also in the mix.
KPS has already been chosen as the preferred bidder for Algoma. Its offer for the Sault Ste. Marie steel maker is conditional on getting a new collective agreement with the USW and on the “support” of the Ontario government.
Any winning bid for either company still requires court approval.
Union leaders say the requirement for a new contract gives them an effective veto over any potential sale — and that’s a power they are willing to use.
The KPS offer seems to meet one of the union’s trinity of demands by promising no operations will be closed and millions will be invested in the companies, but any goodwill it gained with that promise has been lost with the pension threat.
“Why would we even think about allowing a hedge fund to flip this company for a quick profit at the expense of the pensioners?” Howe asked. “My position is even more entrenched now than it was.”
Bill Ferguson, president of USW Local 8782 in Nanticoke, said while the Stelco and Algoma pension plans are different, there’s no reason not to think KPS would behave differently toward Hamilton pensioners than it will to those in the Soo.
“KPS just isn’t showing up very well at all in this,” he said.
Psaros told the Globe that KPS will make a fixed annual payment and an annual profit-based payment into trust funds to finance the pensions and post-retirement benefits Essar Algoma provides employees.
If KPS does win both companies without some plan to top up the pension funds, that would leave the provincial government’s Ontario Pension Benefits Guarantee Fund on the hook for payments. That’s in addition to the $150-million loan the province gave Stelco for pension funding in order to get it out of creditor protection in 2006.
The problem is that the $1.3 billion in combined shortfalls is more than double the $542.7 million in assets in the fund and more than four times the fund’s $371-million surplus. Those figures are from the fund’s March 2015 report.
For Ted McMeekin, Liberal MPP for Ancaster-Dundas-Flamborough-Westdale, “that doesn’t sound like a very good deal at all.
“I’m in agreement with the union’s position and so is the province,” he said. “That would be one hell of a way for KPS to come into our community, by crapping all over the pensioners.”
In an email exchange, University of Toronto steel expert Peter Warrian said, “There is broad acceptance that the two companies should be put together,” and KPS is not the only active bidder pursuing that possibility.
Pension funding, he added, isn’t the largest of the hurdles standing in the way of a potential merger. Those include the involvement of the provincial government, environmental issues in both communities, Ontario’s new cap-and-trade carbon emissions system, the possibility wage and other concessions will be demanded from the union, and the need for capital investment at both companies.
In a related development Thursday, USSC announced the creation of a pool of money to pay performance bonuses to salaried staff — the first such payments they’ve seen since the company went into protection in September 2014.
That was an especially bitter pill for retirees who have had their health benefits cut off in the name of restructuring the company. USSC has also been given court permission to stop paying property taxes in Hamilton and Nanticoke.
In a note to employees, president Mike McQuade said the raises were justified by the salaried group’s “unwavering focus on safety, managing the environmental risks, manufacturing quality steel … and the focus on cost and cash management.”
All of that effort, he said, is making a difference for the company.
“It is your hard work in these areas that has put our company in a position to succeed and has favourably influenced several bidders during our sale process,” he said. “These interested bidders see the value you have helped to create and have the desire to move our business forward.”