An ESOP Fable

Workers turn into owners

The 6,000 men and women who labor at National Steel's Weirton division in West Virginia produce some of the finest steel and tin plate in the world, about $1 billion worth annually. Even so, the plant lost $50 million in 1982. A year ago, when National announced it would stop investing capital in the plant, Weirton employees feared that management would drastically shrink the operation or shut it down altogether.

To keep that from happening, Weirton's workers and management, along with a representative from the office of Governor Jay Rockefeller, formed a joint study committee. Last week the committee announced the details of a $366 million plan under which the workers would buy the plant through an employee stock ownership plan (ESOP).

The rank and file is expected to ratify the plan in a vote to be held possibly May 1, making Weirton Steel the nation's eighth-largest steel producer and largest employee-owned company. The deal was worked out with the help of the management-consulting firm of McKinsey & Co., investment banker Lazard Freres & Co. and other consultants. Their fees will be paid partly by the townspeople of Weirton (pop. 28,000), who have joined in planning everything from sock hops to telethons to save the plant.

The employees, or technically their ESOP, will take over the Weirton operation for $66 million, plus $300 million mostly for inventories of coal, iron ore and unsold products. For their money, the workers are getting an old plant, built during the early part of the century by Steel Pioneer E.T. Weir, but one that has been modernized over the years; its cold rolling mill numbers among the industry's newest. The plan calls for all workers to own shares of the new company's stock, but details of how much each will get have not been worked out. None of the future shareholders will have to put up any cash.

Most of the $66 million will come from National in the form of a 10% 15-year loan, with no payments on the principal until 1991 and none on the interest until the new company has a net worth of $100 million. The $300 million worth of inventory will also be financed largely with borrowed money.

The debt burden may be less onerous than it sounds. Under the laws covering the formation of companies owned by employees, payments of principal on debt (as well as interest) are deductible from income for tax purposes. Even so, the purchase is far from a free lunch for the Weirton workers. McKinsey's analysis of the Weirton operation concluded that the plant could be profitable, but only if the workers would accept a 32% cut in total compensation; annual salaries and benefits average $35,000 to $40,000, high by comparison with the rest of the steel industry. Says Bob Vidas, 57, a 38-year veteran of Weirton: "It's going to be tough. But we'll be sharing. And maybe in a couple of years we'll get our money back."

The plant's current management team, headed by President John Redline, 62, is expected to be kept intact by the new worker-owners, at least for a while. Any new management will be chosen by the company's board. When the employees vote on the deal, they will also be deciding who will sit on that board. It will consist of two members from management, two from the union and six outsiders who will be nominated by Lazard Freres.

National's stock has climbed almost $10, to $23, since the buyout began to look promising last year. Most security analysts view the deal as favorable for National, the fourth largest steel producer in the U.S. Closing Weirton would have saddled the company with $180 million in pension costs, according to one study. About one-third of the workers started with the company at least 30 years ago, which makes them eligible for full retirement benefits. They have chosen to stay on the job anyway. To induce them to vote for the plan, National will assume all pension costs if the new company fails during its first five years.

No one can be sure Weirton will survive under new ownership, and that naturally makes some of the workers edgy. "I'm not saying the plan is going to fail," says Blacksmith Thomas Troia, 57, whose father and four brothers have worked at Weirton. "It may be a perfect thing. But you don't know. You have to go with what you have, not with what may be. I imagine there will be a lot of older fellows going out."

The record of some employee-owned corporations is not altogether reassuring. More than 500 U.S. companies are largely or wholly owned by employees. About 50 or 60 of them, like Weirton, were on the verge of being closed down when they were bought out. Among the largest in recent years have been Rath Packing Co. in Waterloo, Iowa, with sales of $435 million, and bearing maker Hyatt Clark Industries in New Jersey, which had sales of $66 million in its first ten months under employee ownership. Both companies lost money last year. But Corey Rosen, executive director of the National Center for Employee Ownership in Arlington, Va., says that only four employee-bought companies have failed since the early 1970s, when the wave of buyouts began. This file is automatically generated by a robot program, so viewer discretion is required.