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  Stelco's shorthanded, but doesn't deserve a bailout

BENJ GALLANDER and BEN STADELMANN

Friday, October 14, 2005

A few weeks ago, Benj went to London, Ontario, to watch the Knights, the local Ontario Hockey League team, unfurl their Memorial Cup championship banner. After a 40-year wait, this team finally went all the way; their 59-7-2-0 record was the best in league history.

Entering the 2004-05 season, previous results were not indicative of future performance. New management and players joined forces to commence a new era.

One company where we feel that past and future performance will coincide, at least in terms of management and employees, is Stelco. It is hard to think of an example where interrelations have been so dismal for such a long time. Naturally, chronically poor labour-management relations undermine corporate viability.

Stelco is currently about as low as it can go, as it tries to work its way out of a ridiculously long bankruptcy process.

The web here is tangled. Besides the wrangling internal parties, past employees and their pensions must also be taken into account — there is a $1.3 billion shortfall in the pension fund. Bondholders are also weighing in with their demands. Shareholders, as is often the case, appear to be getting the shaft.

Those who know our history with this corporation might suggest that our criticism is nothing but sour grapes. When we went long on this stock, money was lost. When one of us mistimed a short on it, more money was flushed down the proverbial toilet. Obviously, our bets on this firm were poorly placed. Now, if we could go long on the lawyers helping to guide the bankruptcy process, we'd surely rack up a win at last.

What disturbs us most about the situation is that taxpayers are being brought into the deal. The Ontario government has agreed to pony up a loan of $100 million to help the enterprise along. We believe that in certain instances, government should participate in turnarounds, if it a reasonable return is a likely prospect.

However, given the dismal track record and the manner in which management and employees have both imploded, it is our belief that the corporation should sink or swim without public money. If they needed outside funds, they could have accepted one of the previous offers from the contestants who were lined up to buy them. Offers, incidentally, that were snubbed because Stelco ultimately said it could manage on its own — d'oh!

Of course, things could be worse. Stelco could be getting $3.7 billion. That's the amount that the Export Development Corporation — taxpayers' money again — is owed by Delta Air Lines and Northwest Airlines. The money was lent to these companies so they could purchase Bombardier jets, and it represents better than 100 bucks from every Canadian, young and old.

The key to successful investing is assessing the risk-reward ratio. We think it would be best if government did not bail out corporations that are seething with internal animosity.

And while the London Knights had a spectacular season, they are long shots to do well this season, having had many of their players graduate to other levels of hockey. However, we'd rather bet on that team to succeed, than the brawlers at Stelco.


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