USX and Icahn Butt Iron Wills in Proxy Fight : Steel: The famous raider’s stated goal is to recreate U.S. Steel. But his real intentions are the subject of speculation.
What does Carl Icahn really want?
Is the man who was once among Wall Street’s most feared corporate raiders--and who now finds his old tactics unfashionable--really just interested in raising the long-depressed price of his USX Corp. stock? In other words, has he joined the kinder, gentler 1990s?
Or is his proxy fight against USX an effort to put the nation’s largest steelmaker--also one of America’s biggest energy concerns--into play?
Icahn’s motives in what will likely be one of this spring’s hottest proxy fights came under intense scrutiny last week when he issued divergent statements about his intentions for Pittsburgh-based USX.
Icahn is USX’s largest shareholder, with a 13.3% stake. On Wednesday, he announced plans to acquire an additional $800 million in USX securities if his proposal to split USX into two distinct companies--one for energy and another for steel--is approved by shareholders at the firm’s annual meeting May 7 in Findlay, Ohio.
Yet later the same day, Icahn was quoted as expressing a willingness to acquire all of USX for $48 per share, or $10.7 billion, as long as management agrees to a friendly takeover--a condition that Icahn himself conceded is highly unlikely, given his poor relations with USX management.
“If the spinoff is approved, I am definitely a buyer of USX stock up to $48 per share,” Icahn said, referring to the combined value he places on the shares of the two proposed companies. Icahn said he would mount a tender offer at prices of up to $48 per share because he believes that the oil-steel spinoff would sharply boost the stock from its current trading range in the low $30s.
Icahn associates were apparently caught off guard by his ambitious statements about buying all of USX, and insisted that they were only committed to the additional $800-million investment.
Icahn’s latest gambit drew an immediate response from USX Chairman Charles A. Corry, who has spent much of his time out on the investment hustings in recent weeks, urging large institutional holders of USX to vote with management.
“USX shareholders should not be misled,” Corry said. “Icahn has not offered to buy any shares of USX stock at $48 per share or at any other price.”
Corry contends that Icahn’s proposal to split USX would weaken the company’s steel operations, add $115 million in new costs and deprive steel of the much-needed “credit umbrella” provided by USX’s big oil-and-gas unit, ultimately hurting shareholders. Corry said Icahn’s stock-buying program “sounded like a ploy.”
But Icahn argues that USX shareholders have little to lose. His spinoff proposal calls for USX shareholders to receive a stock dividend worth between 80% and 100% of the value of the company’s steel assets, which would then be formed into a new “old” company--U.S. Steel. Ironically, a 1980s-style raider would thus be reviving one of the most time-honored names in corporate America and, in a sense, taking the company back to its gritty roots.
Meanwhile, the surviving USX would be left with its Marathon Oil unit and what would remain of its Texas Oil & Gas subsidiary after the pending sale of the latter’s oil and gas reserves. Icahn argues, in effect, that the parts are greater than the sum of USX. He says USX’s energy-company stock would be worth $39 per share, while USX’s steel business--now the most efficient steelmaker in the country--could fetch $9 per share.
Splitting the oil and steel operations into stand-alone entities would, he says, increase their marketability because Wall Street analysts who follow specific industries would pay closer attention to the two companies than they do to USX as a hybrid conglomerate. And shareholders who want to buy into the oil business would no longer back away from USX because of its big stake in the highly cyclical steel sector.
“The 1970s-style conglomerate is a dinosaur,” said Alfred Kingsley, vice chairman of Icahn’s Transworld Airlines and his right-hand man in the USX proxy fight. “And the lack of analyst coverage matters; it means the stock doesn’t get much attention.”
Kingsley also says Icahn, who has owned USX shares since 1986, has waited long enough to see if management could boost the stock’s value. Excluding dividends, Kingsley says, the company’s stock is worth almost exactly the same today as in 1965.
“In nearly 30 years of purchasing undervalued companies,” Icahn said last week, he has “not seen a more undervalued situation than USX.”
Still, Icahn went out of his way to insist that he isn’t interested in gaining control of USX. He pledged not to try a takeover if management would agree not to take steps to prevent him from raising his stake.
Yet management remains suspicious. USX Vice Chairman Bruce Thomas, who is also the firm’s chief financial officer, said in an interview last week that it “defies reason” to think that Icahn’s breakup plan will automatically increase the value of the shares and create two healthy companies.
“I haven’t been able to figure out why he thinks it’s good for him,” Thomas added. “He thinks two pieces of paper would sell for more than one. It doesn’t make sense.”
Analysts also warn that USX’s steel operations, which only recently recovered from the industry’s devastating crisis of the 1980s, would likely fare better as part of a larger company.
“They are doing well in steel now,” said Father William Hogan, an industrial economist and steel specialist at Fordham University. “USX is highly efficient, with some of the lowest costs in the industry. (The steel operation) could go it alone. But the question is, would it be better off? I don’t think so.”
Neither does the United Steelworkers, the union representing USX’s 18,000 steelworkers.
“The Icahn proposal would represent, in our view, another erroneous step away from USX’s traditional corporate purpose,” one that could “materially affect the strength of the steel business,” a group of local union leaders said in a statement released by the union last week.
But even Icahn’s critics agree that USX is in a much better position to spin off steel--once a dream of former USX Chairman David Roderick--than at any other time in the past decade. Under Roderick, USX acquired Marathon in 1982 in an effort to reduce the company’s dependence on steel. He used oil as a financial buffer when he imposed drastic cost-cutting measures and withstood a six-month strike at the steel unit.
During the 1980s, the company closed many of its aging mills in Pennsylvania, sold a half interest in one of its Ohio mills to a Japanese steelmaker in order to create a new joint venture and spent about $3.5 billion on new technology.
By the time Corry took over in 1989, the company’s cost of making steel had plunged, making USX competitive worldwide. The company was even exporting steel to Japan. As a result, the steel unit posted operating earnings of $430 million last year, complementing the energy sector’s pre-tax profits of $987 million.
“You’re talking about the largest steel producer in the nation, and the most efficient,” Kingsley said. “If Bethlehem Steel can make it on its own just in the steel business, than so can U.S. Steel.”
It’s still not clear where USX’s shareholders will come down in this debate. Both camps have wooed investors with mailings and targeted managers of large funds through visits and phone calls. Yet most big USX shareholders still seem to be on the fence.
“We will wait until the last possible moment to make a decision,” said a spokesman for one big investor, the New York State Employees Pension Fund.
Kingsley seems confident that many of the institutions will side with Icahn, especially since the spinoff proposal is not binding on USX management. Indeed, many may support the proposal if only to force USX’s board to propose another way of boosting the stock’s price. The board has a majority of outside directors who may be wary of opposing the will of the shareholders.
Said Kingsley: “What have they (shareholders) got to lose?”
