The Bottom-Feeder King

Look at all the engineers China is graduating. If China marries its massive labor force to technology, things will be very bleak for this country. In industry after industry, wages are starting to get cut back, fringe benefits are getting cut back—look at the poor airline industry—we’re in danger of exporting our standard of living and importing our unemployment … You can’t have much of an economy if people are just flipping hamburgers, trading stocks, and suing each other … Are our grandchildren going to dive for coins from cruise ships in the East River?”

This jeremiad on the decline of manufacturing isn’t being delivered by a fire-breathing steward in a union hall. Instead, it emanates, in a soft, reasonable monotone, from a short, largely bald man in an impeccable wool suit, seated in a corner office in the shadow of the Seagram Building. An Henri Cartier-Bresson photograph of a French boy holding a wine bottle tilts against one wall.

Wilbur Ross Jr., the Manhattan-based connoisseur of failed companies, was until recently known to boldface cognoscenti as the ex-husband of former lieutenant governor Betsy McCaughey Ross. But in the past two years, Ross, 66, has plunged headlong into the detritus of the industrial heartland and emerged with gold. He’s parlayed a series of ballsy political and financial gambles on left-for-dead assets—midwestern steel mills, southern textile mills, and Appalachian coal mines—into an empire. Ross’s funds now control 1.2 billion tons of coal reserves and what may soon be the country’s last-standing denim mill. “I really think the future of domestic manufacturing is people like Wilbur Ross,” says Bruce Raynor, head of UNITE HERE, a union that includes thousands of garment workers.

“Are our grandchildren going to dive for coins from cruise ships in the East River?” asks Ross.

But Ross, who this fall landed on the Forbes 400 for the first time, has none of the swagger of private-equity barons like Henry Kravis or Teddy Forstmann. He has the agreeable mien of an adviser, accustomed to whispering discreetly into clients’ ears. He gestures gently with age-spot-dappled hands, favors “B.S.” over the more common “bullshit,” and disdains the term “vulture investor.” “We’re a phoenix that rebuilds itself from the ashes.” Now, newly married to socialite Hilary Geary and giddy over a just-struck deal to sell his steel assets at a huge premium, Ross is ready for his close-up.

Thumbnail bio: Born in Weehawken, New Jersey, 1937, the son of a schoolteacher and a lawyer (Wilbur Ross Sr. became a judge). Attended a Jesuit military school, Yale, and Harvard Business School (noteworthy classmate: James Robinson III of American Express fame). Worked for money-management firms and investment banks. Spent 24 years at the New York office of Rothschild, Inc. Ran Rothschild’s bankruptcy-restructuring advisory practice. Tenacious (or obstreperous, depending on which side of the table you sat) negotiator. In late nineties, started a $200 million fund at Rothschild to invest in distressed assets. As the U.S. bubble began to burst, Ross decided he wanted to invest more and advise less. On April Fools’ Day 2000, the 62-year-old banker raised $450 million to plunge into fallen companies.

Excellent timing. The 2000–1 rolling stock-market crash, 9/11, and a globally synchronous recession pushed scores of companies into bankruptcy. New Economy highfliers like Enron, WorldCom, and Global Crossing went bust. But so did Old Economy stalwarts in industries like steel and textiles—victims of excess capacity, global competition, and generous union contracts.

Bankruptcy is the Greyhound bus terminal of corporate America—a dimly lit hall peopled by hard-luck losers, duped lenders, congenital screwups, and, occasionally, powerless victims of vast global forces. And most professional investors regard bankrupt industrial firms as toxic piles; they flee before the crud can soil their Allen-Edmonds wingtips. But Chapter 11 allows those with an eye for damaged goods to gain control of assets on the cheap. Why? Busted companies can reject leases, walk away from debt, terminate health-care promises, and punt pension plans onto the federally sponsored Pension Benefit Guaranty Corporation. Such debt purges can suddenly make crappy business models seem brilliant.

In 2001, when LTV, a bankrupt steel company based in Cleveland, decided to liquidate, Ross was the only bidder. Ross suspected that President Bush, a free trader, would soon enact steel tariffs on foreign steel, the better to appeal to prospective voters in midwestern swing states. So in February 2002, Ross organized International Steel Group and agreed to buy LTV’s remnants for $325 million. A few weeks later, Bush slapped a 30 percent tariff on many types of imported steel—a huge gift. “I had read the International Trade Commission report, and it seemed like it was going to happen,” said Ross. “We talked to everyone in Washington.” (Ross is on the board of News Communications, which publishes The Hill in Washington, D.C.)

With the furnaces rekindled, LTV’s employees returned to the job, but under new work rules and with 401(k)s instead of pensions. A year later, Ross performed the same drill on busted behemoth Bethlehem Steel. Meanwhile, between the tariffs, China’s suddenly insatiable demand for steel, and the U.S. automakers’ zero-percent financing push, American steel was suddenly red hot. The price per ton of rolled steel soared, and in a career-making turnaround, Ross took ISG public in December 2003.

Not all his political bets had turned out so well. Ross, a Democrat by upbringing, in December 1995 married fair-weather (and fair-haired) Republican McCaughey. The policy wonk whose writings helped sink Hillary Clinton’s health-care plan had been drafted to run as George Pataki’s lieutenant governor in 1994. But by 1998, having fallen out with Pataki, she sought the Democratic nomination for governor. In January 1998, the indulgent husband put $2.25 million in seed money into McCaughey Ross’s campaign. But when her candidacy faltered in the summer of 1998, he yanked the cash. They divorced soon after. Says Ross, with understatement, “That gave one a very close-up view of politics.”

After pulling off a quick turnaround in the twentieth century’s iconic business—steel—Ross set about doing the same with the troubled iconic industry of the nineteenth century. In October 2003, he outdueled Warren Buffett for control of Burlington Industries, a large textile company that failed in late 2001. In March 2004, he snapped up Cone Mills, which, like Burlington, was based in Greensboro, North Carolina, and bankrupt. As with the steel companies, the PBGC took over some of the pensions, the unions made concessions, and thousands of laid-off workers were recalled. Most important, debt was slashed. Today, International Textile Group has just about $50 million in debt, less than the two companies were paying in interest a few years ago.

Textiles are less likely to provide giant returns. In January 2005, quotas on imports from China and other low-cost nations are set to expire, and Ross believes most of America’s remaining 700,000 textile jobs will disappear by 2006. “If nothing else, we’ll be the last tree left standing and have good relations with the textile workers, and we’re spending more cash on research and development.” With that, Ross dumps water on his $65 Brooks Brothers tie. The liquid beads up and does not dampen the tie. “Feel this, it’s a silk tie, and it’s dry,” he says, with show-and-tell pride. The tie contains a fabric made by Burlington’s Nano-Tex unit, which endows natural fabrics with some of the properties of synthetics. The Gap is already using it on chinos. “It could be worth as much as the whole price we paid for Burlington!”

After a career in the background, Ross relishes his role as industrial savior. “In steel, every single company we bought would have been liquidated had we not bought it,” he says. And yet he’s not sentimental about assets. Ross auctioned off his collection of American pre-Raphaelite paintings to help settle his divorce from McCaughey, and now collects photography. “Our only girlfriend is IRR [internal rate of return],” he likes to say.

Ross proved that once again last week. “This stock is my largest personal holding, and I’m totally comfortable with it,” Ross said at ISG’s annual meeting in May. Then, on October 25, Ross agreed to sell ISG to Indian steel magnate Lakshmi Mittal for a whopping $4.5 billion in cash and stock. It’s nice being the chairman of a huge company in a vital industry. But it’s nicer to make fourteen times your initial investment in just two years.

By the time they hit their sixties, most private-equity investors get serious about golf, or, like Teddy Forstmann, call it quits. But Ross is just getting started. In August 2003, Ross won an auction for the bankrupt Horizon coal company and has since made it the centerpiece of International Coal Group (sense a theme here?). ICG is now the nation’s fifth-largest coal company. “Coal is the cheapest source of energy for generating electric power,” he says. “We have more BTUs of coal than all the Arabs have of oil.” Again, the timing was impeccable. The spot price of coal has doubled since July 2003.

So long as companies fail—and the government stands as a pension backer of last resort—this genteel phoenix will keep on buying damaged goods that the market has given up on. Outside the elevator in his office stands an entry from the unfortunate cow parade that hit New York a couple years ago. This bovine—Dow Cow—is covered in stock tables. Kitsch? An obvious symbol of a bull? To Ross, it’s just another example of an asset with imperfections. “Look at it, it’s anatomically incorrect.” Sure enough, the creature has both horns and an udder.

The Bottom-Feeder King