The Ross Effect

In a town that doesn’t embrace outsiders, especially in the ultra-competitive automotive market, famed Wall Street investor Wilbur Ross has secured a major position in the supplier sector. But can he grow the market?
9076
Illustration by Mark Elliott

Wilbur Ross compares his ability to buy companies and resurrect them back to profitability to the Phoenix rising from the ashes; however, a comparison to boxer Sugar Ray Leonard may be more apt. Leonard won world championships in five different weight classes while suffering just three defeats. Following a similar career path, Ross has managed to find success in several different industries: automotive, textiles, and steel — and he’s looking for more.

While many who toil within Detroit’s automotive industry have heard or read about Ross, one of Wall Street’s most successful turnaround artists, he’s little understood in a town that doesn’t take well to outsiders (witness Daimler’s nine-year odyssey with Chrysler). But Ross, 69, is no carpetbagger. He created International Automotive Components Group (IAC) out of the wretched refuse of other companies, such as Lear Corp. in Southfield and Collins & Aikman in Troy, with the objective of turning them into a profitable enterprise.

Consider, in October 2006, IAC completed the previously announced acquisition of Lear Corp.’s European Interiors Systems Division on a debt-free basis in exchange for 34 percent of the stock in IAC. The transaction expanded IAC’s presence in Europe to 22 manufacturing facilities in nine countries, with approximately $1.5 billion in
annual revenue.

In early 2007, Ross purchased Lear’s former North American Interior Systems Division and brought it into IAC Group North America, based in Dearborn. The deal involved 26 manufacturing plants and two Chinese joint ventures. Lear also contributed $27 million in cash for a 25-percent interest in IAC North America and warrants for an additional 7 percent, according to IAC’s Web site. IAC reported sales of $5.5 billion in 2007.

In addition, the company purchased most of Collins & Aikman out of bankruptcy court for pennies on the dollar, but only after it outbid other suitors for the more valuable portions of the company prior to its complete liquidation. The linchpin was its move to purchase nine plants from the supplier, including Mexican plants that supplied Ford Motor Co., out from under Cadence Innovation — which thought it had the deal done — for $17 million and other liabilities. That raised the total to $68 million, according to court filings.

On a side note, IAC was issued a $200 million secured line of credit by GE Corporate Lending. IAC will use the loan for working-capital needs, GE officials say. “GE understands the challenges and opportunities facing auto suppliers,” says Jeff Vanneste, IAC’s chief financial officer. “They worked closely with us and structured a financing solution to maximize liquidity and flexibility.”

While many see the automotive industry as a high-risk, not-high-enough-reward enterprise, Ross views the market very differently. For the last three years, auto suppliers have been filing Chapter 11 at record levels. They’ve been struggling with slowing auto sales and rising raw material prices, and the final nail in the coffin has been exploding oil prices, which recently rose above $100 per barrel.

“We’re not risk-takers,” Ross says. “We think we’ve bought things very carefully. We’ve been at this a long time. Very few times we’ve had to sell things at a loss; we’re very [risk-averse].”

Ross, who spends much of his time at his home in Palm Beach, Fla., is a soft-spoken man with a dry wit and a demeanor more reminiscent of the comedian Bob Newhart than J.R. Ewing, the colorful risk-taker from the 1980s TV series Dallas. However, Ross may be more like the latter than the former, as he has a long history of making “risk-averse” investments pay off in big ways, and he agrees that his strategy is closer to “Go Big or Go Home.” However, that’s largely because he’s supremely confident in his decisions, once they’re made.

 

Ross enters into a business sector with a set of plans that can be boiled down to a few simple tenets: Don’t buy companies with a large amount of debt; buy them as cheaply as possible; and ensure it’s a product that’s still needed within a larger industry. Ross’ methods are tried and true, as evidenced by his appearances on Forbes magazine’s “400 Richest Americans” list. He came in at No. 286 last year, with a net worth estimated at $1.7 billion. However, it was a significant jump compared to his place in 2006, when he came in at No. 322 with a net worth estimated at $1.2 billion.

While the plastics arena is where he’s made the most noise in the automotive sector, he’s also moving into the automotive safety arena. The company recently purchased Safety Components International and BST Safety Textiles, and is looking to expand its reach further, he says. “We’re very interested in [the] passive safety area. We’d like to be [involved] in active safety: GPS, crash avoidance, things like that.”

If Ross can make a success out of the ashes of battered auto suppliers, it bodes well for metro Detroit’s economy. While IAC has around 31,000 workers worldwide, more than 4,500 work in Michigan — a good number of whom are in the executive ranks. In turn, the company’s largest customers are GM and Ford.
He’s also looking outside the automotive industry to the home mortgage market, where aggressive financing tactics in recent years have caused large losses for homeowners in Michigan and around the country, as well as at small and large banks, financial institutions, and private-equity firms.

While he’s a cautious investor, Ross waded into the U.S. mortgage-default waters late last year. He provided American Home Mortgage Investment with $50 million in debtor-in-possession financing as it entered bankruptcy, and later purchased its mortgage servicing unit for $435 million. He recently spent $1.1 billion for the servicing business of Option One Mortgage, a unit of H&R Block. The resulting consolidation of those two purchases created the second-largest subprime servicing company in the United States.

“Notwithstanding the problems of the subprime lending industry, we regard mortgage servicing as an attractive business and believe that there are considerable economies of scale attached to it,” he says.

Ross has done his homework in this arena, and it’s reflected, in part, in a letter he sent last August to Fortune magazine. “The present $200 billion of delinquencies will grow to $400 billion or $500 billion next year because $570 billion more low, teaser-rate mortgages will reset to market and consume more than 50 percent of the borrowers’ income,” he wrote. “Therefore, most of the loans will be foreclosed or restructured. Probably 1.5 million to 2 million families will lose their homes. Meanwhile, few lenders will put mortgages on the foreclosed houses, so the prices will plummet. Despite these tragedies, total losses will probably be less than 1 percent of household wealth and only 2 percent to 3 percent of one year’s GDP, so this is not Armageddon. However, even prime jumbo mortgages will be more expensive and more difficult to obtain.”

This is already coming to pass in metro Detroit, as home prices fell 15.1 percent in January from a year ago, according to the Standard & Poor’s/Case-Shiller index. During the same period, U.S. home prices dropped 11.4 percent, the sharpest decline since data used for the index was initially gathered in 1987.

Ross has been there and done that when it comes to the home-lending business. In 2000, Ross acquired Kofuku Bank, a Japanese lender that failed after Japan’s encounter with easy credit. He renamed it Kansai Sawayaka Bank, restructured its bad loans, then sold it to another Japanese bank a few years later.

Ross is moving into the municipal bond insurance arena, as well, having recently acquired a stake in Assured Guaranty, the fifth-largest bond insurer in the country. Ross’ company, WL Ross, will purchase $250 million worth of common stock and commit to buying an additional $750 million at the company’s option.

The Ross Philosophy: Don’t buy companies with a large amount of debt; buy them as cheaply as possible – and ensure it’s a product that’s still needed within a larger industry. Illustration by Mark Elliott

Ross’ recent acquisitions simply mirror his moves in other industries for more than a decade. He jumped into the depressed U.S. steel market during the early part of this decade when his fund, WL Ross & Co., snapped up several steel mills, including Bethlehem Steel and LTV Corp., for $2.2 billion.

Through these acquisitions, Ross virtually captured the entire steel market overnight. After consolidating all of the companies into one unit — International Steel Group — he went to work cutting costs. The pension funds for the companies had already been excised, so he forged a new contract with the United Steelworkers that allowed the company to be profitable.

He also knows when to sell something he’s fixed. In October 2004, Ross reached a deal with Lakshmi Mittal to sell International Steel Group for $4.5 billion, half in stock and half in cash. Ross netted nearly $300 million for himself in the deal.

Now that he’s essentially no longer in the day-to-day operations of the steel business, Ross is looking into coal. In fact, the blueprint is very similar: Buy up several failing coal businesses, consolidate them, and cut the fat. However, he was also very particular about which companies he purchased, limiting his acquisitions to companies without environmental liabilities or to companies where he could reach a deal with federal regulatory agencies to make it easier to post a profit.

However, like Sugar Ray Leonard, he takes his lumps now and then. To date, Ross hasn’t been able to work his magic in the coal industry. Much of International Coal Group was formed from the mines of bankrupt Anker Coal Group Inc. of Morgantown, W.Va., and CoalQuest Development LLC in Ashland, Ky. He paid $275 million in stock and then raised about $250 million in an initial public offering. Since April 2006, the company has lost around 40 percent of its value, according to Bloomberg Financial News.

He’s also investing in textiles through his International Textile Group, which consists of the assets of bankrupt textile makers Cone Mills and Burlington Industries. It also has joint ventures in Mexico, Turkey, and India, which came with those companies. While the textile industry has suffered in the last couple of years, Ross reached a deal with a Chinese clothing chain to sell apparel to the exploding Chinese middle class. He declined to say whether the enterprise was profitable.

One area Ross hasn’t dabbled in yet is the airline industry, and he has no plans to do so. He spent more than a year examining the industry and couldn’t come up with a model that allows for a profit, he says, primarily because of rising fuel prices.

Ross’ long-term success in making lemonade out of lemons is largely due to his uncanny vision to look at an entire industry and see where those specific businesses fit within that industry, all the while taking the chance that he’s purchased those companies at the very lowest value.

However, the Harvard- and Yale-educated investor also keeps the decision-making process to a select few people: himself, primarily.

“I had an interview with them a few years ago, and what he’s done is really impressive,” says one Wall Street loan trader who asked not to be identified. “But ultimately, I wasn’t interested because [Ross] makes every decision, and I knew I couldn’t grow in a place like that.” While deciding that working for Ross wasn’t for him, the trader still follows the moves Ross makes and is wholly impressed by the acquisitions he’s made in distressed industries. “He’s not just a step or two ahead of the curve,” the trader says. “He’s miles ahead. He has a vision and is able to [bring it] to fruition.”

Ross is well-versed in the bankruptcy process, making his name as one of the country’s foremost bankruptcy advisers during the 1970s and gaining further prominence with his involvement in straightening out the junk bond failures during the 1980s. He moved to Rothschild in 1996 to run an equity fund, but by 2000, he’d had enough of making money for other people. He bought out the fund and formed WL Ross & Co. with $440 million, according to published reports.

The keys to his decision-making process are the aforementioned principles and a lot of due diligence, according to one acquisition expert.

“He’s been able to do kind of what a lot of people talk about doing: Position yourself in those markets and product lines as a platform to add value to [customers],” says Rick Walawender, a principal with the law firm of Miller Canfield Paddock and Stone in Detroit who specializes in corporate acquisitions.

While the last five to seven years were filled with companies and private-equity investors that jumped into the acquisition market believing they could package several companies, cut duplicative functions, and sell them at a decent profit, few have made it work. “A lot of times the private equity firms get into something where they don’t know what they’re doing,” Walawender says. “They try to flip a company in two or three years, and I don’t think you can do that right now.”

In other words, Ross’ success is rare. And while one would think such a track record of success would inflate one’s ego, Ross’ is clearly in check. “When we made what turned out to be a great coup, namely the investment in the steel industry, BusinessWeek rewarded me with the cover. And what it said underneath the picture was: ‘Is Wilbur Ross Crazy?’ That’s a question that my wife believes still hasn’t been satisfactorily answered,” Ross joked during a recent speech during the Automotive News World Congress.

Ross figures to continue to make investments and acquisitions in the auto industry because there are deals to be had. He noted in a speech in February that his fund had $10 billion to invest, and he had used just $5 billion. “For all practical purposes,” he says, “we really have no size limitations.”

Given his track record, it’s likely he could get more if he needed to do so, the loan trader says. Additionally, with all the failures in automotive, mortgage lending, and other arenas, an investor with vision and cash is in a good spot right now. “You know, we went through a period where nobody was afraid of anything, and now everybody’s afraid of everything. They’re afraid to fail,” he says, adding there are plenty of opportunities.

Ross predicted earlier this year that a 750,000-unit drop in North American vehicle sales would bring consolidation of automotive parts suppliers, and that at least one of the “walking wounded” Tier Ones would be liquidated this year.

That liquidation could be Plastech, although that’s unlikely, says Global Insight analyst Aaron Bragman. Plastech filed for Chapter 11 protection in U.S. Bankruptcy Court in Detroit in February after Chrysler decided it didn’t want to provide the Dearborn-based plastic components supplier with another advance payment. The Auburn Hills automaker subsequently canceled its contracts and demanded its tooling and dies. It was Plastech’s third request for such a payment in a span of six months, according to court documents.

A Detroit bankruptcy court judge said Chrysler couldn’t take the equipment or cancel the contract, as it would make it impossible for the company to emerge from bankruptcy. Shortly thereafter, General Motors, Ford, and Johnson Controls also demanded their tooling equipment. In early April, Johnson Controls offered to purchase the underhood and interiors units of Plastech. Terms were not disclosed.

More likely, Ross surmises, the “walking wounded” will be a smaller supplier or suppliers who don’t have a proprietary process or some other differentiator to ensure their survival. “Some of them are just going to go away,” he says, “because you don’t need the capacity. So it’s only if they have a particular customer relationship or a particular technology. [It] could be just another injection molder or just another blow molder.” Only time will tell.

Facebook Comments