Management Buyout of Nassco Final
A management-led group at San Diego-based National Steel & Shipbuilding Co. on Thursday completed a previously announced buyout of the financially troubled shipbuilding and repair yard from Boise, Ida.-based Morrison Knudsen Co. The purchase price was not released.
The buyout means that Nassco will continue as an independent, employee-owned company, according to Nassco President Richard Vortmann, one of four senior executives who have purchased shares in the company. The buyout also will keep “thousands of jobs and millions of dollars of economic activity in San Diego,” Vortmann said in a prepared statement.
Vortmann, along with Chief Financial Officer Fred Hallett and Senior Vice Presidents Alfred W. Lutter Jr. and Donald A. Spanninga initially will own 20% of the new company. The remaining 80% of Nassco’s stock will be held in an Employee Stock Ownership Plan trust.
Cash Paid for Shares
Hallett declined to discuss details of financing involved in the deal. However, he said that Nassco executives paid cash for their shares and that Nassco used “corporate resources” to buy shares that are being held in the ESOP trust. Hallett declined to discuss financing involved in the deal. Stock held in that trust eventually will be turned over to employees as they become vested, Hallett said.
However, if stock options included in the agreement are exercised, senior executives eventually would own 35% of the company and employee ownership would fall to 45%. Morrison Knudson retained an option to eventually acquire 20% of the new company.
The sales agreement has been ratified by Nassco’s non-union employees and workers who are represented by the International Assn. of Machinists. Nassco employees represented by the ironworkers union are expected to approve the sale Saturday, Hallett said.
Nassco IAM-represented employees welcomed the sale because it ended some of the uncertainty that has clouded Nassco’s future, according to Peter Zschiesche, business agent for Machinists Lodge 3891.
However, Zschiesche doubted that the ESOP will “be a big, immediate motivating factor among the employees . . . (because) it’s not as important as the day-to-day things that go on in the plant. Employees are more interested in wages, health care, seniority and treatment on the job.
“It is a fringe benefit, because employees will now get shares of stock allocated to them, that they can turn to cash when they retire or leave the company. Also, in this age of mergers and buyouts, it’s more secure to have ownership in-house.”
Hallett declined to discuss financing involved in the deal but Zschiesche noted that the buyout “means that the issue of whether the shipyard stays open or not is now more of a San Diego issue. The local banks and business community are going to have to take more of an interest in this issue.”
Considered Closing Yard
Morrison Knudson, which has been restructuring its collection of businesses, strongly considered closing the San Diego shipyard and selling off its remaining shipbuilding contracts to Avondale Shipyard, a New Orleans-based competitor, Hallett said.
Nassco came much closer to closing “than any of us felt comfortable with,” Hallett said. But, he said, the contract sale “was the one very viable alternative that Morrison Knudson was considering.”
Nassco, a wholly owned subsidiary of Morrison Knudsen since 1979, has reported $26.9 million in operating losses during the past two years. Last August, Morrison Knudsen Chairman William Agee said that the “low level of work in the shipyard is likely to produce operating losses” until the company wins new contracts to build or repair ships. Within months of making that statement, Agee was trying to sell the yard.
Employment at the 120-acre shipyard on San Diego Bay just south of the Coronado Bridge has fallen to 1,800 since hitting an all-time high of 7,600 in 1980. Since 1980, the yard has subsisted almost entirely on contracts to repair ships.
Nassco’s management in the past had blamed the company’s inability to win contracts on high labor costs. But, in recent years, the company has negotiated new labor contracts that reduced wages by as much as 50% for some of the 1,000 shipyard employees. Those contracts, which were signed after a bitter three-week strike in August, will remain in effect after the buyout, according to Hallett.
Recently Awarded Contracts
The Navy recently awarded Nassco contracts to build two fast combat-support ships. With those two contracts in hand, Nassco has a $400-million order backlog through 1992. The backlog will be increased if the shipyard wins contracts for two more fast combat-support ships the Navy is expected to award in late 1989 and 1990.
“We’re designing and building the first of those two ships,” Hallett said. “In addition, our repair business does about $75 million a year.”
With the sale concluded, Nassco remains the only privately owned shipyard on the West Coast. “When it comes to new construction on the West Coast, we’re it,” Hallett said. “Lockheed closed its doors in Seattle and Todd Shipbuilding (in San Pedro) is in Chapter 11 (bankruptcy) proceedings,” Hallett said.
Hallett said the new company will remain viable because “private yards can do the work cheaper than public yards.”
“And right now, private yards do only about 25% to 30% of the work done on the West Coast,” Hallett said. “Obviously, if Congress chooses to put more work into the private sector, we believe we’re a cost-effective alternative.”
