Detroit Steel Tackles a Financial Problem
That was the essence of the problem. Significantly, the management realized that a major financing had to be planned years in advance. Therefore, early in the venture we were engaged to help prepare the way. There were intermediate difficulties which were fateful, yet these were surmounted because the public relations program persevered through SUSTAINED action.
There was no particular reason at the outset why the financial communities should have known much about Detroit Steel. The company, of course, published annual reports. It did, of course, announce its dividends and furnish share owners brief interim figures. The common stock was listed on the New York Stock Exchange, but was not geographically widespread. The company had not had a public financing.
There was a lingering public impression of the shifting managements and the rundown condition of the old mill at Portsmouth. A new picture had to be painted in solid colors a picture of a reborn steel mill as modern and efficient as the best of them. Pig iron capacity was being tripled; ingot capacity doubled. Product lines were changed and new ones added. The wire mill emphasis was shifted by dropping old low profit merchant trade lines such as nails, barbed and fence wire, in order to concentrate on more profitable industrial wire products that enjoy a strong year round demand. To be added also were continuously rolled sheet and strip steel for which a fast growing market was foreseen.
Truly, the Detroit Steel operation at Portsmouth was to be a new and different business; a modern low cost producer with an experienced and capable, aggressive management. The plant was already advantageously located for access to raw materials and for freighting in and out by rail, river, and highway. Since the war's end, the area had changed and expanded phenomenally into the fastest growing market for hot rolled and cold rolled sheet steel. It was the public relations job to spread these truths and to impress the picture on financial men by taking them to see these revolutionary changes at first hand, and to meet the management people.
The sustained program had these highlights:
1. Steady dissemination of news concerning company progress and new developments including setbacks due to conditions over which management had little or no control.
2. A series of eight 4 by 8 foot exhibit panels, in color, giving the before and after history of the remaking of the Portsmouth mill.
These portrayed:
a. The long term history of the Portsmouth mill.
b. Pictorial presentation of the various phases of the mill operation.
c. Details of the modernization program.
d. Maps of the company's new marketing areas.
e. Product list.
f. Names of important customers in the company's natural marketing area.
g. Financial projections explaining the dollars and cents impact of the new mill's operation.
h. Industry comparison of competitive costs for similar facilities.
3. Extensive presentations before financial groups in Detroit, Chicago, Cleveland, Philadelphia, New York, and other financial centers.
By this visual program the management ably presented its plans to the leaders of financial opinion. But fate interfered. The company's financing plan involving bonds and preferred stock was ready. Application was made to the SEC for approval. That was, unfortunately, just at a time when the market for new preferred stocks declined. As a result, the company's public financing plan had to be withdrawn. But the financing itself was not to be abandoned or long delayed.
Here again, fate intervened, this time in the company's favor. With war in Korea, the government needed all the steel it could get. The facts concerning the company's history and proposed expansion program were ready. These were submitted to the Reconstruction Finance Corporation. On the company's showing, the RFC made Detroit Steel a loan of $45,000,000. The company scrupulously kept the financial community informed of this development and of the terms of the RFC loan.
Peace returned, yet fate interposed another hurdle. This was a business recession. For Detroit Steel it was untimely because, as the new Portsmouth facilities were completed, the demand for steel was already slumping. Here again the management faced the fact and forthrightly explained why it was necessary to stop paying cash dividends. It did, however, go on a stock dividend basis. In addition, out of a sense of fairness to shareholders, top management salaries were cut drastically.
The government was liquidating the RFC, and by late autumn of that year the steel business was rapidly getting better. The company's affairs improved, too. As sales and production increased, the financial community was informed. Detroit Steel common stock rallied from a low of $8 per share to more than double.
Good earnings were foreseen. The time was auspicious for doing that long planned public financing and repaying the RFC. Arrangements had to be made without delay. The stage had to be set. There was a critical period of about six weeks for this.
The company went all out to make sure that this public financing would go through. Group and luncheon meetings were held with selected brokerage and investment banking representatives. Detroit Steel's top officers talked across tables to many key men who mold financial opinion. The company, its record, plans, and prospects were laid bare and discussed. Questions were answered frankly.
The New York Society of Security Analysts was addressed by the president, with other officers.
A critical hurdle to be met was what "rating" as an investment the new mortgage bonds would have. Effect on money market psychology of a bond's rating is inestimable, affecting the cost of borrowing as well as salability of the bonds. This particular rating was important because the company was "unseasoned" by reason of never having done a public financing, in the conventional sense. Company executives met with the rating agencies (Moody's, Fitch, and Standard & Poor's). Their specialists on steel were flown out to inspect the Portsmouth property. Senior officers escorted them through the mill and made available to them all essential and even confidential figures.
In consequence, an acceptable rating for institutional investment was issued on the forthcoming $30,000,000 of 4% per cent bonds.
Group junkets were conducted to inspect the Portsmouth property. The guests were security analysts for investment banking firms, commercial banking trust departments and insurance companies, syndicate managers, and bond salesmen. They came from Omaha, Chicago, Toronto, Detroit, Fort Wayne, Cleveland, New York, Hartford, Boston, and Philadelphia. These underwriters and institutional investors had an opportunity to tour the plant, and see it in operation. They met the Detroit Steel management team, which worked conscientiously to explain every phase of the business. Some 35 company executives and top supervisors made up the host team.
President Eisenhower's heart attack occurred the day after the bonds went on the market. Uncertainty had the securities markets acting nervously. But Detroit Steel had crossed the goal line.
The game was won when the public financing was completed in the form of $30,000,000 of mortgage bonds, $6,000,000 of preferred stock, and an offering of 503,000 shares of common stock to share owners which was heavily oversubscribed.
Detroit Steel will ultimately have a finishing capacity of 1,300,000 tons annually, ranking it among the top 15 steel producers and projecting sales volume possibly to over $150,000,000 a year.
