Insider's Game

Like the rooster who takes credit for the sunrise, the Romney campaign touts the success of Steel Dynamics.  “American Dream,” is a 60-second campaign spot that shows workers talking about their company, which grew from nothing in 1994 to a 6,000-employee operation. The workers say nothing about Romney or Bain Capital, for obvious reasons.  And about 25-seconds into the ad, a voiceover drives home a fraudulent message: “But SDI almost never got started. When others shied away, Mitt Romney’s private leadership team stepped in.”

Suppose the Winklevoss twins took credit for saving Facebook’s IPO.  Their claim would be far more plausible than Romney’s suggestion, that his “private leadership team” played an essential role in SDI’s startup. The startup of Steel Dynamics is well known and well documented.  Bain’s role was, to put it charitably, minor. I know because I remember that deal and the people who put it all together. As with his bogus claims that he “created” 100,000 jobs,  or that he deserves credit for the auto bailout, or that he played an instrumental role the success of Staples , Romney shows a limitless contempt for facts.

SDI’s startup began on June 30, 1994. Up until that date, the company was just a couple of guys with a business plan who had burned through most of their $731,000 in equity funding. They had no money to build their planned greenfield steel mill in Butler, Indiana. But on June 30, SDI closed about $370 million in debt and equity financing, which enabled construction to begin.

That’s the way it works whenever a large industrial project is being financed. Nobody puts in real money until all of the financing and contractual arrangements are nailed down and executed. And prior to June 1994, there was never any shortage of financiers willing to step up. The entire financial plan was designed so that no financial sponsor, like Bain, could ever exert control. There are many private equity deals set up so the financial equity sponsors are able to call the shots. But not this time.

On June 30, 1994 , a senior secured credit agreement for an amount of about $200 million, the $55 million Subordinated Debt Purchase Agreement, the Equity Agreements, which provided for $81.3 million in equity contributions, the Stockholders Agreement, and the Registration Agreement, all became effective simultaneously.  Bain’s equity contribution was less than 5% of the total $370 million initial financing.

According to the Shareholders Agreement, Bain Capital would have no more than one director on a 10-person board, which was comprised of four members of SDI management, three individuals representing different companies within SDI’s supply chain–from Preussag , Omnisource and Heidtman–plus three individuals representiing financial investors: Bain, GE Capital, and a Connecticut venture capital firm, J.H. Whitney.  GE Capital and J.H. Whitney also stepped up to take pieces of the convertible subordinated notes, but not Bain.

When SDI went public in November 1996, Bain’s 13.3% equity stake was smaller than that of GE Capital, Preussag Stahl AG, or Omnisource. Within 18 months after the IPO,  Bain sold almost all of its shares. (A Bain representative rejoined the board in 2002 when its hedge fund acquired a 2.7% stake.)

The startup relied very heavily on government financing provided from outside the U.S.   The German government-owned development bank, Kreditanstalt für Wiederaufbau , or KfW, was by far the largest lender in the $200+ million bank facility.   That government sought to support SDI’s purchase of advanced German technology and machinery, which were the guts of the new mini-mill.

SDI’s founder, Keith Busse, is well known as a pioneer in the steel industry.   The story of how he and his team at Nucor built the first-of-its-kind mini-mill, relying on advanced German technology, in Crawfordsviile, Indiana in 1987 is was known throughout the industry by 1991. It was also detailed at length in two New Yorker profiles , and in a terrific book, American Steel, by Richard Preston. The Crawfordsville plant was the first mini-mill to fabricate flat rolled steel, a higher-end product compared to the mini-mills’ traditional product, reinforcing bar.   In very simple terms, moving the manufacture of flatrolled steel toward mini-mills, and away from blast furnace production, was somewhat analogous to the move toward desktops computers away from mainframes.   Mini-mills had much lower capital and operating costs, and much greater operating flexibility.  In 1993, Busse and some colleagues decided to leave Nucor and strike out on their own.

From SDI’s incorporation in September 1993 up until June 29, 1994, Busse’s team worked with an investment banker to pull all these different financing arrangements together, so that they could all close simultaneously.  He was from a Cleveland investment banking firm (since subsumed by UBS) called  McDonald & Co,  and his name was David Stickler.  Busse’s reliance on Stickler is evident in an article published in Crain’s Cleveland Business  soon after the deal closed. I can attest to the veracity of the story. Bain was just one of many investors who put up a relatively small amount of money but exercised no effective control. There was never a moment in time when SDI’s startup was in danger of not happening, but for the “leadership” of Bain Capital or Mitt Romney.

Again, the parallels with the Winklevoss twins cannot be overstated. It’s a stereotype come true. A rich kid from Harvard, who offers nominal value-added, feels entitled to take most of the credit for the hard work done by others. It doesn’t matter if it’s the auto bailout , or the expansion of Staples, or SDI. That’s how Romney envisions his “American Dream.”